Village Super Market, Inc. — Q3 FY2021 Form 10-Q
Reporting period: 13 and 39 weeks ended April 24, 2021; comparisons are with the periods ended April 25, 2020. Amounts below are in millions unless otherwise noted. The company operates ShopRite, Fairway Markets and Gourmet Garage supermarkets.
Financial performance
| Metric | Q3: 13 weeks | Year to date: 39 weeks |
|---|---|---|
| Sales | $481.1, up 5.0% | $1,494.0, up 14.7% |
| Gross profit | $133.4; margin 27.73% vs. 28.34% | $413.2; margin 27.66% vs. 27.73% |
| Operating income | $3.8 vs. $15.2 | $15.3 vs. $20.6 |
| Net income | $2.6 vs. $11.2 | $10.5 vs. $15.7 |
| Diluted EPS, Class A | $0.18 vs. $0.77 | $0.72 vs. $1.09 |
Q3 same-store sales declined 5.5%; year-to-date same-store sales rose 2.3%. Management attributed the quarterly comparison chiefly to unusually high sales at the start of the pandemic in March 2020. On a two-year stacked basis, same-store sales were up 7.7% for the quarter and 7.4% year to date. Digital sales increased 127% and 155%, respectively, against the comparable periods.
Operating margin was 0.81% for the quarter versus 3.32% a year earlier, and 1.02% year to date versus 1.58%. Management cited lower Manhattan sales, Fairway integration and commissary transition costs, reduced gross-margin leverage, higher occupancy and digital-related costs. Fairway’s higher-margin sales partly offset gross-margin pressure. Q3 net income included a $0.3 after-tax gain on a pharmacy prescription-list sale, net of store-closing costs; the prior-year quarter included $0.9 million of after-tax pharmacy-sale gains and $0.1 million of pension settlement charges. Management reported adjusted net income declines, excluding specified items, of 78% for the quarter and 40% year to date.
Cash flow, liquidity and debt
- Operating cash flow was $33.0 million year to date, down from $59.4 million. Management attributed the decline primarily to lower net income and working-capital movements, including comparison with pandemic-related inventory and payable changes in the prior year.
- Capital expenditures were $14.9 million; reported cash increased $1.0 million to $112.7 million. Cash and cash equivalents were $112.7 million at April 24, 2021, while working capital was $40.7 million and the current ratio was 1.27.
- Total debt excluding lease obligations was $75.6 million, down from $80.6 million at July 25, 2020. This included $68.6 million of long-term debt and $7.0 million current debt. The balance sheet also reported $307.1 million of operating and finance lease obligations, current and long-term combined.
- The company had no revolving-line borrowings at period end and reported compliance with credit-facility covenants. The facility provides up to $75 million of remaining revolver availability after the $50 million conversion to a secured term loan; $7.3 million of letters of credit were outstanding.
Outlook, risks and other developments
- Fiscal 2021 same-store sales guidance: increase of 1.0% to 2.0%. The company expects lower gross margins, excluding acquired stores, in part from continued everyday-low-price investments.
- Fiscal 2021 capital expenditures are budgeted at $25 million. The board’s stated current intention was to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management expected available cash, operating cash flow and the credit facility to meet foreseeable needs.
- Management expected a 30.0%–31.0% effective tax rate and approximately $1.4 million of net periodic pension costs for fiscal 2021; pension contributions were expected to be immaterial.
- COVID-19 continued to affect shopping patterns and operating costs. Fairway and Gourmet Garage Manhattan locations were hurt by residential migration and reduced commuter and tourist traffic. Fairway sales and operating profits were below initial expectations; integration, execution and synergy risks remain.
- Village closed its Silver Spring, Maryland ShopRite on February 22, 2021, citing insufficient sales to sustain profitability; the reported financial impact was not material. The filing also identifies competition, inflation and labor costs, reliance on Wakefern, collective-bargaining and multi-employer pension exposure, food-safety, insurance, impairment and cybersecurity risks. Routine litigation was not expected by management to materially affect results or liquidity.
- Village purchases substantially all merchandise from Wakefern and held $82.7 million of demand deposits there at quarter end, in addition to $54.7 million of notes receivable. Interest-rate swaps hedge variable-rate borrowings; swap fair value was $2.0 million. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track same-store sales against the 1.0%–2.0% fiscal-year outlook, including the two-year comparison and Manhattan recovery.
- Monitor Fairway integration, commissary costs, store performance and any impairment indicators for goodwill or intangible assets.
- Assess whether margin pressure, labor and digital-delivery costs moderate as pandemic-related comparisons normalize.
- Reconcile operating cash flow and capital spending with debt repayment, lease commitments, dividends and remaining credit capacity.
- Review Wakefern concentration and related-party balances, credit-facility covenant headroom, and the stated COVID-19, pension, labor and cybersecurity exposures.