Ingles Markets, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2014, ended June 28, 2014. The quarter covered 13 weeks. Results are unaudited; year-to-date comparisons are with the nine months ended June 29, 2013.
Business context and results
Ingles operated 203 supermarkets across six southeastern states, plus 95 in-store pharmacies and 78 fuel centers. It also operates a fluid dairy business and earns shopping-center rental income.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $978.3 million | $934.0 million | $2,871.1 million | $2,789.7 million |
| Gross profit | $215.2 million | $210.7 million | $624.8 million | $617.5 million |
| Gross margin | 22.0% | 22.6% | 21.8% | 22.2% |
| Operating income | $33.4 million | $32.9 million | $87.4 million | $94.1 million |
| Operating margin | 3.4% | 3.5% | 3.0% | 3.4% |
| Interest expense | $11.6 million | $16.0 million | $35.0 million | $47.3 million |
| Net income (loss) | $13.8 million | $(14.4) million | $33.8 million | $5.2 million |
| Class A diluted EPS | $0.61 | $(0.62) | $1.49 | $0.21 |
Cash flow, debt and liquidity
- Cash from operations for the first nine months was $74.0 million, compared with $82.1 million a year earlier; management attributed most of the decrease to higher cash tax payments.
- Investing activities used $72.8 million, including $73.1 million of capital expenditures. Financing activities used $14.0 million, including $10.8 million of dividends. Cash declined $12.8 million from the fiscal-year start to $4.0 million.
- At June 28, 2014, total debt was approximately $909.3 million, including $895.5 million of long-term debt and $13.8 million current. The current ratio was approximately 1.87.
- The company had no borrowings on its $175 million revolving credit facility; $10.9 million of letters of credit were outstanding. It reported covenant compliance and capacity for approximately $243 million of additional borrowings under the most restrictive covenant.
- Debt includes $700 million of 5.75% senior notes due 2023 and Recovery Zone Facility Bonds. Management cited approximately $941 million of unencumbered real property and equipment at net book value.
Material changes and unusual items
- Quarterly sales increased 4.7%; nine-month sales increased 2.9%. Comparable-store sales excluding gasoline grew 2.1% in Q3, including an estimated 88-basis-point benefit from Easter shifting into Q3, and 0.9% for the nine-month period.
- Higher gasoline volumes supported sales: gallons sold increased approximately 9.8% in Q3 and 12.1% year to date, while average retail gasoline prices declined approximately 5.2% and 1.9%, respectively.
- Gross margin declined 0.6 percentage points in Q3 and 0.4 points year to date, primarily reflecting lower gasoline margins. Excluding gasoline, grocery-segment gross margin improved 20 basis points in both comparisons.
- Q3 2013 included $43.1 million of pretax debt-extinguishment costs tied to the refinancing, contributing to that quarter’s net loss and making the year-over-year profit comparison less representative. The refinancing replaced $575 million of 9.5% notes with 5.75% notes; Ingles estimated annual interest savings of $21.6 million on the refinanced principal.
- Year-to-date operating income fell despite higher sales, while lower interest expense and the absence of the prior-year extinguishment loss lifted net income. Prior-year nine-month results also included a $3.9 million gain on sale of a former store; the current quarter included a $0.9 million gain on an outparcel sale.
- Management revised prior-period presentation of shopping-center rental activity from net to gross and combined fluid dairy and rental activities within “Other”; it said the corrections were not material.
Outlook, risks and contingencies
- Fiscal 2014 capital expenditures were expected to be approximately $100–$120 million; spending was $72.6 million through the first nine months, per management’s discussion. The company expects annual net capital expenditures of approximately $110–$120 million going forward.
- Management expects store maturation and remodeling to contribute to sales growth, but says remaining-fiscal-year sales depend on economic improvement, inflation, gasoline prices and raw-milk prices. It expects to continue regular quarterly dividends, subject to board discretion and debt restrictions.
- Risks cited include competition, regional and national economic conditions, food-production and delivery disruptions from adverse climate, gasoline-price changes, labor and utility cost increases, financing availability, execution of expansion and remodeling, and real-estate performance.
- Self-insurance reserves totaled $29.8 million. Reserve estimates depend on claims experience and incurred-but-not-reported claims; most company properties are self-insured for casualty losses and business interruption, although liability coverage is maintained.
- Debt agreements include financial covenants and cross-default provisions that could permit credit termination or accelerate obligations following specified defaults. The company reported compliance at quarter-end. No material off-balance-sheet arrangements or material changes in contractual commitments were reported.
Investor verification points
- Verify the sustainability of comparable-store growth after separating Easter timing, gasoline sales and fuel-price effects.
- Assess whether lower gasoline margins and the overall gross-margin decline persist, and track margins excluding gasoline.
- Reconcile operating cash flow, capital spending and the decline in cash; review the timing and funding of planned store investments.
- Review debt maturities, variable-rate exposure on the bonds, covenant headroom and restrictions on dividends or repurchases.
- Consider the prior-year refinancing charge and asset-sale gains when comparing underlying earnings across periods.
- Monitor self-insurance reserve assumptions, tax uncertainties and the estimated impact of economic, labor, utility and real-estate risks.