Village Super Market, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Third quarter and first 39 weeks ended April 23, 2016; comparisons are with the periods ended April 25, 2015. The company operates 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. Financial amounts below are in millions unless otherwise noted.
Financial results and liquidity
| Metric | 13 weeks ended Apr. 23, 2016 | 13 weeks ended Apr. 25, 2015 | 39 weeks ended Apr. 23, 2016 | 39 weeks ended Apr. 25, 2015 |
|---|---|---|---|---|
| Sales | $387.9 | $387.1 | $1,197.6 | $1,178.0 |
| Gross profit | $106.7 | $107.1 | $325.0 | $321.0 |
| Operating income | $10.1 | $10.6 | $29.7 | $31.1 |
| Net income | $5.9 | $13.2 | $16.6 | $23.7 |
| Operating margin | 2.60% | 2.72% | 2.48% | 2.64% |
| Gross margin | 27.52% | 27.67% | 27.13% | 27.25% |
Third-quarter diluted EPS was $0.42 for Class A and $0.30 for Class B; nine-month diluted EPS was $1.17 and $0.85, respectively. Interest expense was $1.1 million for the quarter and $3.4 million year to date.
For the first 39 weeks, operating cash flow was $46.7 million, versus $7.5 million a year earlier; capital expenditures were $13.8 million, dividends $9.5 million, and cash increased $21.1 million to $80.2 million. Management attributes the operating-cash-flow comparison largely to the prior-year $33 million New Jersey tax settlement, lower inventory and payable timing.
At April 23, 2016, working capital was $54.2 million and the current ratio was 1.6. Total current and long-term debt, including capital and financing leases and Wakefern notes payable, was approximately $44.3 million; no borrowings were outstanding on the $25 million revolving facility, extended through December 31, 2017. Cash included $55.3 million of overnight deposits at Wakefern; the company also had $42.3 million of notes receivable from Wakefern. Pension liabilities were $23.5 million, down from $32.2 million at July 25, 2015.
Changes, unusual items and management commentary
- Same-store sales rose 0.2% in the quarter and 1.7% year to date. Quarterly growth reflected competitor closures and sales at expanded or replacement stores, partly offset by Winter Storm Jonas and new competitor openings. Year-to-date sales growth was also partly offset by competitor openings and deflation in meat, seafood and dairy.
- Gross margin fell 0.15 percentage points in the quarter and 0.12 points year to date. Management cited lower departmental margins; quarterly pressure also included higher Wakefern warehouse assessments and promotional spending.
- Reported net income declined substantially, but comparisons include significant prior-period tax-settlement benefits. Excluding specified tax and Superstorm Sandy insurance items, management said net income fell 10% for the quarter and 14% year to date, mainly due to lower gross margin and higher operating costs. The current quarter included a $0.9 million insurance recovery, or $0.545 million after tax; the prior-year quarter included a $7.293 million tax benefit from the New Jersey settlement.
- The company froze benefits under its non-union employee and pharmacist defined-benefit plan effective March 31, 2016. It recognized a pre-tax curtailment gain of $18.796 million, partly offset by a $7.428 million remeasurement adjustment in accumulated other comprehensive loss; these items did not affect operating income. No fiscal 2016 pension contributions had been made by April 23; approximately $3 million was expected for the year.
- Operating and administrative expense included higher self-insured medical claims. The company also reported a $0.940 million Superstorm Sandy insurance recovery. Management said remaining litigation was not expected to materially affect financial condition, results or liquidity.
Outlook and principal risks
Management expected fiscal 2016 same-store sales growth of 0.5%–1.5%, capital expenditures of approximately $20 million, and an effective tax rate of 41%–42%. Planned capital projects included completing the Stirling store expansion and remodel, one major remodel and several smaller remodels. The Board intended to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management believed available cash and operating cash flow would meet foreseeable working-capital, capital-expenditure and debt needs.
Risks highlighted include intense competition and narrow margins; deteriorating Maryland-store sales that could lead to impairment charges; reliance on Wakefern for substantially all merchandise and key services; labor, healthcare and pension costs (about 92% of employees are covered by collective bargaining agreements); food-safety exposure; possible multiemployer-plan contribution increases or withdrawal liabilities; impairment of store assets; tax uncertainty; and disruption or cybersecurity breaches affecting company or Wakefern information systems. Management also noted that higher medical and fringe-benefit costs could pressure expenses.
Important facts for investors to verify
- Whether same-store sales remain within management’s 0.5%–1.5% fiscal-year outlook, particularly given competitor openings and Maryland sales trends.
- Whether margins and operating costs stabilize after the reported gross-margin decline and higher healthcare and fringe-benefit costs.
- Actual fiscal-year capital spending, pension contributions and dividend payments relative to stated plans.
- Cash availability and exposure to Wakefern, including deposits, notes receivable and the cooperative relationship.
- Whether the pension-plan freeze, multiemployer-plan funding developments, tax matters or store-performance trends result in additional material charges.