Village Super Market, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended July 30, 2016. The year included 53 weeks, with the extra week in the fourth quarter; FY2015 included 52 weeks. Amounts below are in millions unless stated otherwise.
Business context
Village operated 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. It is a major Wakefern cooperative member, owns 13.2% of Wakefern, and purchases substantially all merchandise from it. The company completed the Stirling, New Jersey store expansion and remodel during FY2016.
Financial and operating performance
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Sales | $1,634.9 | $1,583.8 | Up 3.2%; the 53rd week added $29.2, or 1.8%. Same-store sales rose 1.4% excluding the extra week. |
| Gross profit / margin | $445.0 / 27.22% | $433.1 / 27.35% | Gross profit increased; margin declined 0.13 percentage point. |
| Operating income / margin | $44.3 / 2.71% | $43.5 / 2.75% | Operating income increased slightly; margin narrowed. |
| Net income / margin | $25.0 / 1.53% | $30.6 / 1.93% | Down 18.2%, mainly reflecting a substantial tax benefit in FY2015. |
| Diluted EPS, Class A | $1.77 | $2.16 | Class B diluted EPS was $1.29 versus $1.58. |
| Operating cash flow | $64.1 | $17.5 | Increase reflected working-capital changes, including income taxes, inventory and supplier payables. |
| Capital expenditures | $20.0 | $23.5 | FY2017 budget: approximately $25.0. |
Cash and cash equivalents were $88.4 at year-end; working capital was $60.5 and the current ratio was 1.61. Long-term debt was $43.6, primarily capital and financing lease obligations. The company had no borrowings on its $25.0 revolving credit facility and was in covenant compliance. Shareholders’ equity was $271.7. FY2016 cash dividends totaled $12.6.
Material changes and unusual items
- Net income fell from FY2015’s $30.6, which included a $6.5 tax benefit from settling New Jersey tax disputes. FY2016 included a $0.5 after-tax Sandy-related insurance recovery and an estimated $0.3 of net income from the extra week. Excluding the listed unusual items in both years, management said net income declined 6%, due primarily to lower gross margin and higher operating and administrative expense.
- The New Jersey tax settlement was paid in March 2015: $33.0 gross cash payment, approximately $21.0 net of federal tax benefit. New Jersey is auditing tax years 2011–2014 and years covered by the settlement agreement.
- FY2016 operating and administrative expense included a $0.9 insurance recovery related to Superstorm Sandy. Cumulative insurance collections were $3.6; further recovery was uncertain.
- The company amended and froze benefits under its nonunion employee and pharmacist pension plan effective March 31, 2016. It recorded a $17.9 pretax curtailment gain in other comprehensive income. The defined-benefit pension liability was $26.7; the discount rate declined to 3.08% from 4.02%, increasing the projected obligation.
Outlook, risks and commitments
- Management forecast FY2017 same-store sales from flat to up 2%, an effective tax rate of 40.5%–41.5%, and approximately $25.0 of capital expenditures, including the start of a Bronx store project and store remodels.
- The board intended to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management expected operating cash flow and other liquidity sources to meet foreseeable requirements.
- Management expected higher medical and other benefit costs; FY2017 defined-benefit plan contributions were projected at $3.0. FY2016 contributions to multi-employer pension plans were $5.5, and certain plans were underfunded.
- Lease commitments totaled $166.3 in minimum payments: $84.8 for capital and financing leases and $81.5 for operating leases. These amounts include interest and exclude certain additional lease charges.
- Key risks include intense price competition and narrow margins; deteriorating Maryland-store sales; reliance on Wakefern for merchandise, services and patronage dividends; labor negotiations and pension costs; food safety; and potential information-system interruption or data breaches. Approximately 92% of employees were covered by collective bargaining agreements, and about 13% were represented by unions with contracts expired or expiring within a year.
Important facts for investors to verify
- Whether same-store sales and margins meet the FY2017 outlook, particularly after excluding the extra week from FY2016 comparisons.
- Whether Maryland stores stabilize, and the financial impact of competition and new competitor locations.
- Wakefern-related concentration: $63.6 of demand deposits and $42.7 of notes receivable were held with Wakefern at year-end, alongside the merchandise purchasing and patronage-dividend relationship.
- Future multi-employer pension contributions, labor contract outcomes and any potential withdrawal liability.
- How planned capital spending, substantial lease commitments and dividends affect cash generation and liquidity.