Village Super Market, Inc. — Q2 FY2023 Form 10-Q
Reporting period: 13 and 26 weeks ended January 28, 2023; financial statements are unaudited. Village operates ShopRite and Fairway supermarkets and Gourmet Garage specialty markets, primarily in the northeastern United States. It is a major member of Wakefern, its principal supplier.
Financial performance
| Metric | 13 weeks ended Jan. 28, 2023 | 13 weeks ended Jan. 29, 2022 | 26 weeks ended Jan. 28, 2023 | 26 weeks ended Jan. 29, 2022 |
|---|---|---|---|---|
| Sales | $563.9m | $537.4m | $1,083.6m | $1,031.6m |
| Operating income | $16.1m | $14.7m | $31.3m | $25.2m |
| Net income | $12.3m | $10.1m | $23.4m | $17.5m |
| Class A diluted EPS | $0.85 | $0.69 | $1.61 | $1.20 |
| Gross margin | 27.47% | 27.84% | 28.07% | 28.09% |
| Operating margin | 2.86% | 2.72% | 2.89% | 2.45% |
| Net margin | 2.19% | 1.88% | 2.16% | 1.69% |
Quarterly sales rose 4.9% and first-half sales rose 5.0%. Same-store sales increased 3.2% and 3.7%, respectively, primarily due to retail price inflation; new Gourmet Garage and the remodeled Pelham store also contributed. Net income increased 22% for the quarter and 34% for the first half. Management attributed the gains mainly to same-store sales growth, lower operating and administrative expense as a percentage of sales, and higher interest income.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $48.4m, versus $40.3m a year earlier. Capital expenditures were $28.6m, implying operating cash flow less capital expenditures of about $19.8m, compared with $9.8m in the prior-year period.
- Cash was $124.5m at January 28, 2023, down from $134.8m at July 30, 2022. Investing activities used $64.4m, including $32.6m of net additional investments in Wakefern notes and $3.3m invested in a real estate partnership.
- Working capital was $34.3m and the current ratio was 1.21, compared with $79.8m and 1.50 at fiscal year-end. The decline primarily reflects moving Wakefern notes receivable into long-term investments.
- Borrowings excluding lease obligations totaled $86.5m, up from $73.7m at July 30, 2022. Lease obligations totaled approximately $314.6m. The company had $67.7m available on its $75m revolving credit line and was in compliance with its debt covenants.
- Village held approximately $90.4m of Wakefern notes receivable and $99.6m of demand deposits at Wakefern. The notes are variable-rate and Wakefern may prepay them; certain early repayment conditions could reduce interest earned.
Changes, outlook and risks
- Gross margin declined 0.37 percentage points in the quarter, mainly from lower departmental margins, higher Wakefern warehouse assessments, promotion spending and LIFO charges. First-half gross margin was nearly unchanged year over year. Expense leverage improved: operating and administrative expense fell as a share of sales by 0.47 points for the quarter and 0.42 points for the first half, mainly from labor productivity and sales leverage, partly offset by wage increases.
- Interest income increased to $2.7m for the quarter and $4.6m for the half-year, primarily from higher rates and larger Wakefern balances. Interest expense also rose year over year, mainly due to higher average debt.
- Management expects fiscal 2023 same-store sales growth of 2.0%–4.0%, capital expenditures of approximately $60m, and an effective tax rate of 31%–32%. The Board’s current intention is to maintain quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management expects cash, operating cash flow and credit availability to meet anticipated needs.
- Planned investment includes three replacement stores expected to open in fiscal 2024 and 2025, remodels, the Vineland shopping-center purchase, and technology and store upgrades. Capital spending was reduced from prior estimates because some replacement-store construction costs shifted to fiscal 2024.
- Material risks include intense competition and narrow margins; inflation, labor costs and supply-chain disruption; dependence on Wakefern for merchandise, services and patronage dividends; collective-bargaining and multi-employer pension exposure; Fairway performance and integration; food safety; and cybersecurity or information-system interruptions. Approximately 88% of employees are covered by collective bargaining agreements.
- Village terminated one defined-benefit pension plan in April 2022 after funding it; the filing reports no remaining obligation or plan assets for that plan. Routine litigation is not expected by management to materially affect the company. The company also disclosed potential New Markets Tax Credit recapture if contractual or regulatory requirements are not met, though management does not anticipate recapture.
Key facts for investors to verify
- Whether sales growth and margin performance persist as inflation, promotional spending, LIFO costs and wage pressures change.
- The collectability, repayment terms and interest returns on substantial Wakefern deposits and notes, given the company’s related-party concentration.
- Execution, timing and total funding needs for the planned store replacements and other capital projects, including the Old Bridge partnership’s estimated $15m–$20m Village contribution and future $9.3m lease obligations.
- Debt growth, interest-rate exposure and covenant headroom; swaps hedge variable-rate loan cash flows, but the company remains exposed to financing and operating risks.
- The assumptions underlying management’s same-store sales, capital expenditure, tax-rate and dividend expectations; the filing cautions that interim results are not necessarily indicative of full-year results.