Village Super Market, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the 13 weeks ended October 25, 2014; compared with the 13 weeks ended October 26, 2013. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context and results
Village operates 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania and is a major member of Wakefern, its principal supplier and cooperative. Sales growth reflected two replacement stores opened in the prior year and current year, along with 1.6% same-store sales growth.
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Sales | $379.7 | $357.0 |
| Gross profit / margin | $102.8 / 27.07% | $93.7 / 26.24% |
| Operating income / margin | $7.9 / 2.08% | $6.2 / 1.75% |
| Income before taxes | $7.4 | $6.2 |
| Income tax expense | $3.5 | $13.0 |
| Net income (loss) | $3.9 | ($6.8) |
| Net income (loss) per share, Class A basic/diluted | $0.31 / $0.27 | ($0.55) / ($0.55) |
| Net income (loss) per share, Class B basic/diluted | $0.20 / $0.20 | ($0.36) / ($0.36) |
Cash flow, liquidity and balance sheet
- Operating cash flow was $0.1 million, versus cash used of $2.2 million a year earlier. Capital expenditures were $4.4 million, dividends were $3.1 million, and cash declined $8.1 million to $69.3 million.
- Management budgeted $25 million of fiscal 2015 capital expenditures, primarily for three major and several smaller store remodels.
- At October 25, 2014, working capital was $21.2 million and the current ratio was 1.2:1. Cash and equivalents were $69.3 million; current assets were $158.5 million and current liabilities $137.2 million.
- Long-term debt was $45.1 million, comprising capital and financing lease obligations of $44.1 million and Wakefern notes payable of $1.1 million. Current lease obligations and Wakefern notes payable were $0.4 million and $1.3 million, respectively.
- The company also reported $41.0 million of notes receivable from Wakefern and $25.8 million invested in Wakefern. Cash deposits at Wakefern were $47.0 million and earn overnight money-market rates.
- Village expects to contribute approximately $6 million to its defined benefit pension plans in fiscal 2015. Pension liabilities were $24.6 million.
Material changes and unusual items
- Sales increased 6.4%; same-store sales rose 1.6%. Gross margin improved 0.83 percentage points, mainly from lower promotional spending, improved departmental margins, lower Wakefern warehouse assessments and product mix.
- Operating and administrative expense as a percentage of sales increased 0.37 percentage points. The quarter included a $2.27 million pre-tax write-off of remaining Superstorm Sandy insurance receivables after a court ruling favored the insurer; the company had previously collected $2.64 million of estimated recoveries.
- Net income improved from the prior-year loss, which included a $10.05 million tax charge following an adverse New Jersey Tax Court ruling and replacement-store pre-opening costs. Excluding the Sandy write-off in the current period and those prior-year items, management said net income increased 53% year over year.
- Interest expense rose to $1.13 million from $0.74 million, which the company attributed to changes in capitalized interest costs. The effective tax rate was 47.5%, versus 210.1%; excluding the prior-year tax charge, the prior-year rate was 48.1%.
Outlook, risks and contingencies
- Management expected fiscal 2015 same-store sales to range from flat to up 2%, modest retail price inflation, and a 46%–47% effective tax rate. The Board intended to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management believed available liquidity and operating cash flow would meet foreseeable needs.
- Village is appealing New Jersey tax assessments. No payment is due until the dispute is resolved; gross unrecognized tax benefits were $29.8 million at quarter-end, and a favorable resolution could reduce them by up to that amount. Resolution within 12 months was considered reasonably possible.
- Key risks include intense competition and narrow supermarket margins; geographic concentration in New Jersey; weaker performance at the Maryland stores; reliance on Wakefern; collective bargaining coverage for approximately 91% of employees; pension and healthcare costs; food safety; and potential interruption or security breaches affecting information systems.
- The filing says certain multi-employer pension plans are underfunded and contributions may increase. The company could not yet determine the impact of health-benefit mandates effective January 1, 2015.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and outcome of the New Jersey tax appeal, including any cash-payment exposure and changes in unrecognized tax benefits.
- Whether the 0%–2% same-store sales outlook and expected margin performance are achieved, particularly given competition and Maryland store results.
- Cash generation relative to the $25 million capital-expenditure plan, dividends, debt payments and expected pension contributions.
- Any further recovery of Sandy-related insurance claims; the remaining receivable has been written off, although Wakefern continued to pursue recovery.
- Potential increases in labor, pension and healthcare costs, and any material change in the company’s relationship with Wakefern.