Ingles Markets, Inc. — Q2 FY2013 Form 10-Q
Business context and period. The unaudited quarter and six months ended March 30, 2013 cover 13 and 26 weeks, respectively. Ingles operated 203 supermarkets across six southeastern states, alongside fluid dairy processing and shopping-center rentals. Results are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Three months ended Mar. 30, 2013 | Three months ended Mar. 24, 2012 | Six months ended Mar. 30, 2013 | Six months ended Mar. 24, 2012 |
|---|---|---|---|---|
| Net sales | $918.6 million | $881.7 million | $1,851.4 million | $1,799.9 million |
| Gross profit / margin | $198.3 million / 21.6% | $192.4 million / 21.8% | $406.2 million / 21.9% | $394.2 million / 21.9% |
| Operating income | $27.7 million | $23.8 million | $61.2 million | $54.2 million |
| Interest expense | $15.7 million | $14.9 million | $31.3 million | $30.0 million |
| Net income | $8.1 million | $6.5 million | $19.7 million | $17.1 million |
| Class A basic / diluted EPS | $0.35 / $0.33 | $0.28 / $0.27 | $0.85 / $0.81 | $0.73 / $0.70 |
Cash flow and liquidity. For the six months, operating cash flow was $45.0 million versus $73.7 million, which management primarily attributed to higher working-capital requirements. Investing activities used $39.4 million, including $47.0 million in capital expenditures and $7.7 million of property-sale proceeds. Financing activities provided $1.8 million; the period included $23.0 million of dividends and net borrowing. Cash ended at $12.2 million, compared with $4.7 million at September 29, 2012. Current assets were $438.2 million and current liabilities $295.2 million at March 30.
Debt. Total debt was $860.0 million at March 30, 2013, versus $833.5 million at March 24, 2012. Balance-sheet long-term debt was $810.4 million, with $49.6 million current. The $175 million revolving credit line had $62 million outstanding and $8.2 million in letters of credit. Senior notes carry an 8.875% coupon, mature in 2017, and became callable May 15, 2013 at 104.438% of principal. Recovery Zone bonds of approximately $99.7 million mature in 2036; annual mandatory redemptions of $4.53 million begin in 2014. The company reported covenant compliance with significant margin.
Material changes and management commentary
- Quarterly sales rose $36.9 million; six-month sales rose $51.5 million. Comparable grocery sales increased 3.4% for the quarter and 3.0% for the half. Excluding gasoline and the Easter timing benefit, comparable sales growth was 2.7% and 2.4%, respectively.
- Easter fell in Q2 FY2013 rather than Q3 FY2012, contributing an estimated $8.2 million to grocery sales in the quarter and first half. Management cited higher sales and a property-sale gain as key reasons net income improved.
- Quarterly gross margin declined 0.2 percentage points, reflecting competitive pressure and lower gasoline margins; operating expenses were 19.1% of sales versus 19.2%. For the half, gross margin and operating expenses as a percentage of sales were unchanged year over year.
- In Q2, Ingles sold a former store property for $7.5 million and recorded a pretax gain of $3.9 million. This is a notable contributor to operating income and is not necessarily recurring.
- Interest expense increased as debt was higher and interest on the distribution-center bonds, previously capitalized during construction, was expensed after the facility opened in mid-2012. The six-month effective tax rate increased to 37.0% from 34.3%, primarily due to expiring tax credits.
Outlook, risks and other items
- Management expected fiscal 2013 capital expenditures of approximately $100–$130 million; $47.0 million had been spent in the first half. It estimated ongoing net annual capital expenditures of approximately $110–$180 million. Construction commitments at March 30 were $6.2 million.
- A new store opened in April 2013. Ingles did not anticipate further openings in the remainder of fiscal 2013, while stores under construction were expected to open in fiscal 2014. Management said sales growth would depend on economic improvement, inflation, and gasoline and raw-milk prices.
- Management expected to continue regular quarterly dividends, subject to board discretion, results, financial condition, and debt restrictions. A special dividend and an accelerated regular dividend were paid in December 2012; reported first-half cash dividends per share were $0.99 for Class A and $0.90 for Class B. The next regular dividend was declared April 1 and paid April 25, after quarter-end.
- Key risks cited include competition and pricing pressure, regional economic conditions, gasoline-price changes, labor and utility costs, financing availability, weather and food supply, and execution and returns on new, expanded or remodeled stores. Self-insurance reserves were $27.8 million; estimates rely in part on claims incurred but not reported. No asset impairments were recorded in the quarter or first half.
- The company said it had no material changes in contractual obligations or market-risk factors from its prior annual report, and no material off-balance-sheet arrangements. Disclosure controls were deemed effective at a reasonable assurance level.
Important facts for investors to verify
- How much of the sales and earnings improvement persists after adjusting for Easter timing and the $3.9 million property-sale gain.
- Whether competitive pressure and gasoline margins continue to weigh on grocery gross margin, and how comparable sales trend excluding gasoline and Easter effects.
- Working-capital trends and operating cash generation, given the year-over-year decline in first-half operating cash flow.
- Debt refinancing or repayment plans around the May 2013 senior-note call date, and the effect of debt service and required bond redemptions on liquidity and capital spending.
- Whether planned capital expenditures, store openings and remodels produce expected sales and returns, and whether dividends remain sustainable within debt covenants and cash-flow needs.