Ingles Markets, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 26, 2016; the quarter comprised 13 weeks. Comparisons are with the periods ended March 28, 2015. Ingles operated 202 supermarkets across six southeastern states and also operated a dairy business and shopping centers.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $924.3 million, up 1.0% | $1,875.4 million, down 0.2% |
| Gross profit / margin | $228.7 million / 24.7% (prior: 23.9%) | $454.4 million / 24.2% (prior: 23.6%) |
| Operating income / margin | $33.1 million / 3.6% (prior: $33.6 million / 3.7%) | $64.8 million / 3.5% (prior: $71.2 million / 3.8%) |
| Net income | $14.4 million (prior: $14.3 million) | $27.3 million (prior: $29.3 million) |
| Class A diluted EPS | $0.71 (prior: $0.71) | $1.35 (prior: $1.45) |
| Interest expense | $11.2 million (prior: $11.6 million) | $23.2 million (prior: $23.6 million) |
Six-month operating cash flow was $57.6 million, versus $58.9 million. Investing used $70.6 million, including $71.2 million of capital expenditures; financing provided $14.5 million. Cash increased $1.6 million to $9.1 million. Current assets were $429.9 million and current liabilities $231.1 million at March 26, 2016.
Total debt was approximately $907.7 million, compared with $886.1 million at September 26, 2015; management reported it was below the $928.5 million level at March 2015. Debt included $700 million of 5.75% senior notes due 2023, $30.0 million outstanding on a $175 million line of credit, facility bonds, and other borrowings. The company was in compliance with its financial covenants and stated it could incur approximately $361 million of additional borrowings under its most restrictive covenant.
At March 26, 2016, total assets were $1.681 billion, total liabilities $1.231 billion, and stockholders’ equity $449.8 million. Quarterly dividends were $0.165 per Class A share and $0.15 per Class B share.
Material changes versus prior periods
- Quarterly sales rose 1.0%, while six-month sales edged down 0.2%. Excluding gasoline, sales increased 2.3% for the first half. Comparable store sales excluding gasoline and extra Easter sales rose 1.6% for the quarter and 1.5% for the half year.
- Gasoline sales dollars fell 12.5% in the quarter as the average price per gallon declined 19.3%, despite gallons sold increasing 8.5%. First-half gasoline sales were $200.7 million, down from $243.1 million.
- Gross margin improved, but operating and administrative expenses grew faster than sales: up 5.7% for the quarter and $17.6 million for the half year. Reported drivers included wages, maintenance, advertising, insurance claims, and card-processing charges. Half-year operating income and net income declined.
- First-half net income benefited from a 36.0% effective tax rate versus 39.7% a year earlier; management attributed the lower rate to nonrecurring discrete items in the prior-year period.
- Retail non-food and perishables sales grew, while gasoline sales declined. The quarter included Easter sales that fell in the prior year’s third quarter.
Outlook, risks, and notable items
- Fiscal 2016 capital expenditures were expected to total approximately $120–$145 million; $71.2 million had been spent during the first half. Management expected ongoing net annual capital expenditures of approximately $100–$160 million to maintain and modernize stores. Construction commitments at period-end were $13.9 million.
- Management expected store openings and maturation of recently opened or expanded stores to contribute to sales growth. Future sales were described as dependent on economic conditions, inflation, gasoline prices, and raw milk prices. No earnings or revenue forecast was provided.
- The company said operating cash flow, its credit line, and expected short- and long-term financing should be sufficient for planned expenditures and working capital for the foreseeable future, while cautioning that financing might not be available on acceptable terms.
- Key risks cited include competition and pricing pressure, lower gasoline prices, labor and utility cost increases, economic and weather conditions, execution of expansion plans, financing availability, and real-estate performance. Debt agreements include cross-default provisions and restrictions on additional dividends; lenders may terminate credit following specified defaults.
- Self-insurance reserves totaled $35.9 million, including $14.2 million current; estimates cover claims incurred but not reported. Employee insurance expense rose to $19.2 million for the first half from $16.3 million. Management reported no asset impairments in the first half and no material changes in contractual obligations or off-balance-sheet arrangements.
- The company expected to continue regular quarterly dividends, subject to board discretion and debt-agreement limits. Disclosure controls were assessed as effective at a reasonable-assurance level.
Investor verification priorities
- Assess whether stronger grocery and non-food sales and improved gross margin can offset higher operating expenses and continued pressure from gasoline revenue.
- Review the sustainability of first-half cash generation against capital spending, debt service, and working-capital needs.
- Verify the debt maturity, interest-rate, covenant, and cross-default terms, including available line-of-credit capacity and covenant headroom.
- Monitor self-insurance claims and reserves, and the extent to which the lower first-half tax rate reflects nonrecurring items.
- Track planned store openings, remodels, capital expenditures, and the sales performance of new and expanded locations.