Village Super Market, Inc. — Q1 Fiscal 2012 10-Q
Reporting period: 13 weeks ended October 29, 2011; unaudited. Comparative period: 13 weeks ended October 30, 2010. Unless stated otherwise, dollar amounts are in thousands.
Business context
Village operated 28 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. In July 2011, it acquired store fixtures, leases and pharmacy lists for two Maryland stores for $6,595; the stores opened as ShopRites after remodeling. Village is the second-largest member of Wakefern, from which it purchases substantially all merchandise.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Sales | $342,737 | $307,397 | +11.5% |
| Gross profit | $92,876 | $80,927 | +14.8% |
| Operating income | $12,202 | $7,314 | +66.8% |
| Income before taxes | $11,643 | $6,770 | +71.9% |
| Net income | $6,736 | $3,934 | +71.2% |
| Operating cash flow | $5,789 | $4,684 | +$1,105 |
Same-store sales increased 8.1%. Gross margin rose to 27.10% from 26.33%; operating margin increased to 3.56% from 2.38%, and net margin to 1.97% from 1.28%. Class A basic/diluted earnings per share were $0.59/$0.49, versus $0.35/$0.29; Class B basic/diluted were $0.38/$0.38, versus $0.23/$0.23.
Gross-margin improvement reflected lower Wakefern warehouse assessment charges, stronger departmental margins, improved product mix and lower promotions, partly offset by higher LIFO charges. Operating and administrative expense fell to 22.15% of sales from 22.47%, reflecting lower payroll and benefit costs and sales leverage, partly offset by new-store advertising and opening costs. Interest expense increased, primarily due to interest on the pension withdrawal liability recorded in fiscal 2011. The effective tax rate was 42.1%, compared with 41.9%.
Cash flow, liquidity and obligations
- Operating cash flow was $5,789; investing cash outflow was $6,601, including $6,257 of capital expenditures; financing cash outflow was $1,229, including $1,145 of dividends. Cash decreased $2,041 to $89,321.
- At October 29, 2011, current assets were $157,174 and current liabilities $108,865, for working capital of $48,309 and a 1.4-to-1 current ratio. Cash was $89,321.
- Long-term capital and financing lease obligations were $40,624; notes payable to Wakefern totaled $3,179, including $1,029 current. No current lease obligation was reported. The filing does not provide a separate total-debt figure.
- Village held a $19,856 Wakefern note receivable bearing fixed interest of 7%, scheduled to mature November 22, 2012, and reported $71,209 in Wakefern demand deposits earning overnight money-market rates.
- The company budgeted approximately $20,000 in fiscal 2012 capital expenditures. Planned projects include starting two replacement stores, small remodels and solar panels at one store. It expected to contribute another $2,938 to its pension plans during the remainder of fiscal 2012.
Changes, outlook and risks
Management attributed sales growth to the two Maryland stores, inflation-driven larger transactions, increased customer counts, improved sales at newer stores, and competitor store closings that benefited six locations. It expected fiscal 2012 same-store sales growth of 4%–6%, with stronger growth in the first half as inflation and the effect of competitor closings moderate in the second half. Management expected retail price inflation, continuing cautious consumer behavior, and an effective tax rate of 41.5%–42.5%; it also anticipated pressure from medical and pension costs. Management believed available cash and operating cash flow would be sufficient for foreseeable working capital, capital expenditure and debt requirements. The quarter’s results were not necessarily indicative of the full year.
- Competitive pricing, narrow supermarket margins, economic weakness, unemployment, inflation and changing customer purchasing patterns could weigh on results.
- The Maryland stores are in a new market for Village; brand awareness and sales may initially be lower while marketing and operating costs are higher.
- Village depends heavily on Wakefern for merchandise, services and patronage dividends; a material deterioration or change in that relationship could raise costs or hurt operations.
- Approximately 92% of employees were covered by collective bargaining agreements. Work stoppages and rising health-care or pension costs are risks; management also expected contributions to some underfunded multiemployer plans may increase.
- Village recorded a $7,028 charge in fiscal 2011 for withdrawal from the UFCW Local 152 Retail Meat Pension Fund. It remains potentially liable for additional withdrawal liability if a statutory mass withdrawal occurs within the specified period; the amount could be material.
- Tax examinations, changes in tax laws and disputes with New Jersey could affect the tax rate. Food-safety issues also pose potential sales and liability risks.
Disclosure controls were assessed as effective, and the company reported no significant first-quarter changes in internal controls over financial reporting.
Key facts for investors to verify
- Whether same-store sales growth and the Maryland stores’ sales and costs track management’s 4%–6% full-year outlook.
- Whether margin gains persist as inflation and competitor-closure benefits moderate, and as promotional, labor, medical and pension costs evolve.
- Actual fiscal 2012 capital spending, cash generation, dividend policy and pension contributions compared with stated plans.
- The status and potential amount of any additional multiemployer pension withdrawal liability, and the funding condition and contribution requirements of other pension plans.
- Wakefern’s financial condition and the terms and collectability of the company’s deposits, receivable and other business exposures to the cooperative.
- Developments in New Jersey tax disputes and their potential impact on the effective tax rate.