Ingles Markets, Inc. — Form 10-Q Summary
Reporting period: Third fiscal quarter and first nine months ended June 25, 2016; comparisons are to periods ended June 27, 2015. The interim financial statements are unaudited. Ingles operated 201 supermarkets across six Southeastern states.
Financial performance
| Metric | Three months ended June 25, 2016 | Year-over-year | Nine months ended June 25, 2016 | Year-over-year |
|---|---|---|---|---|
| Net sales | $957.2 million | +1.2% | $2,832.6 million | +0.2% |
| Gross profit / margin | $232.9 million / 24.3% | +$10.7 million; +0.8 percentage points | $687.2 million / 24.3% | +$22.0 million; +0.8 percentage points |
| Operating income / margin | $31.9 million / 3.3% | +$0.8 million; margin unchanged | $96.6 million / 3.4% | -$5.7 million; down from 3.6% |
| Net income | $12.7 million | -$1.1 million | $40.0 million | -$3.1 million |
| Class A diluted EPS | $0.63 | Down from $0.68 | $1.98 | Down from $2.13 |
| Operating cash flow | Not provided for the quarter | — | $103.6 million | Up from $101.2 million |
Operating and administrative expenses rose 4.6% in the quarter and 4.7% year to date; as a share of sales, they increased to 20.8% from 20.2% and 19.9%, respectively. The quarter’s net margin was 1.3%, versus 1.5% a year earlier; the nine-month margin was 1.4%, versus 1.5%.
Financial position and cash flows
- At June 25, 2016, cash was $5.4 million, total assets $1.690 billion, and stockholders’ equity $459.2 million. Working capital was approximately $194.7 million; current ratio was approximately 1.83.
- Total debt was $898.2 million, including $700 million of 5.75% senior notes due 2023, $86.2 million of facility bonds, $89.8 million of secured notes and other debt, and $22.3 million drawn on the $175 million credit line. Cash was $2.1 million lower than at fiscal year-end.
- Nine-month capital expenditures were $107.8 million, compared with $73.5 million a year earlier. Investing activities used $107.1 million; financing activities provided $1.5 million, versus $28.8 million used in the prior period.
- The company paid $9.7 million in dividends during the nine months. Quarterly dividends were $0.165 per Class A share and $0.15 per Class B share.
Material changes and management commentary
- Quarterly sales growth reflected higher non-gasoline sales, partly offset by lower gasoline dollars. Gasoline sales dollars fell 6.8% as average price per gallon declined 14.4%, despite gallons sold increasing 8.9%. Excluding gasoline and the prior-year Easter timing effect, comparable grocery sales increased 2.6%.
- For the nine months, sales excluding gasoline increased 2.3%; comparable grocery sales excluding gasoline increased 2.1%. Lower gasoline revenue offset growth in other categories.
- Gross margin improved, while higher labor, repairs and maintenance, advertising, bank charges, and depreciation pressured operating expenses. Management attributed quarterly net income decline to higher expenses and taxes, as well as demolition of properties for redevelopment.
- The June quarter included a $1.6 million loss on asset sales or disposals, primarily from demolition. Nine-month results included a $0.9 million loss, compared with a $0.3 million gain in the prior-year period. No asset impairments were recorded in the nine months.
- Quarterly effective tax rate was 40.2%, compared with 34.6%, reflecting a reconciliation of estimated prior-year tax expense to filed returns. The nine-month rate was 37.4%, versus 38.2%, partly because of non-recurring items in the prior-year period.
Outlook, risks and contingencies
- Fiscal 2016 capital spending was expected to total approximately $120 million to $145 million; management cited a longer-term annual net capital expenditure range of approximately $100 million to $160 million. Construction commitments were $5.8 million at quarter-end.
- Management expected sales growth to depend on economic improvement, inflation, gasoline and raw milk prices, and maturation of newer and expanded stores. It planned continued store remodeling and modernization. No specific earnings forecast was provided.
- The company expected to continue regular quarterly dividends, subject to board discretion and debt-agreement restrictions. Management believed available operating cash flow and financing would meet foreseeable needs, but noted financing may not be available on acceptable terms.
- Key risks include competition, regional economic conditions, food production and delivery disruptions, labor and utility costs, gasoline prices, financing availability, real estate development, and the performance of new or remodeled stores. Debt agreements include financial covenants and cross-default provisions; the company reported covenant compliance at June 25, 2016.
- Self-insurance liabilities totaled $35.7 million, including $13.9 million current; estimates depend on claims and incurred-but-not-reported losses. The filing reported no material off-balance-sheet arrangements and no material changes in contractual obligations apart from items disclosed in the report.
Important facts for investors to verify
- Whether stronger non-gasoline sales and improved gross margins can offset expense growth and weaker year-to-date operating income.
- Progress and returns on elevated store and distribution capital spending, including planned fiscal 2016 projects and store openings.
- Gasoline prices and volumes, comparable-store trends, and the contribution from new, remodeled, or expanded stores.
- Debt service, credit-line availability, covenant headroom, and the effect of cross-default provisions.
- Whether self-insurance estimates, tax adjustments, and redevelopment-related disposal costs change materially.