AMCON Distributing Company — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016, compared with the three months ended December 31, 2015. AMCON distributes consumer products through its wholesale business and operates 16 natural and health food stores. Sales are reported net of retailer incentives and include excise taxes.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Sales | $310.1 million | $322.0 million | Down 3.7% |
| Gross profit / margin | $18.3 million / 5.9% | $19.0 million / 5.9% | Gross profit down 3.4% |
| Operating income | $2.1 million | $2.5 million | Down 18.0% |
| Net income | $1.05 million | $1.36 million | Down 22.8% |
| Diluted EPS | $1.52 | $1.85 | Down |
| Operating cash flow | $2.17 million | $12.72 million | Down |
Wholesale revenue declined 3.5% to $303.9 million; segment gross margin remained 5.1%. Retail revenue fell 14.2% to $6.2 million, while gross margin improved to 44.0% from 41.9%. Retail reported a $0.30 million operating loss, versus $0.06 million operating income a year earlier. Consolidated operating expenses decreased 1.1% to $16.2 million, primarily due to lower employee benefit costs. Interest expense was $0.22 million.
Operating cash flow was $2.2 million, compared with $12.7 million. The prior-year quarter benefited substantially from a $17.0 million inventory-related cash source; inventory used $1.4 million in the current quarter. Capital expenditures were $0.40 million. Financing cash outflows included $1.04 million of share repurchases, $0.73 million of net credit-facility repayments, and $0.13 million of common dividends.
Liquidity, debt, and balance sheet
At December 31, 2016, cash was $0.33 million, current assets were $84.4 million, and current liabilities were $23.5 million. The company reported $9.8 million outstanding under its revolving credit facility and $3.3 million of current and long-term debt, for approximately $13.1 million in total debt. Facility availability was $52.7 million against a borrowing limit of $62.5 million. Total assets were $107.0 million and shareholders’ equity was $66.7 million.
The $70 million facility matures in July 2018, is secured by company assets, and bears interest at prime or LIBOR plus 125–175 basis points, subject to utilization. The company reported an average facility interest rate of 3.12%, no cross-defaults, and that availability had not fallen below the 10% threshold relevant to its fixed-charge covenant. Common dividends are generally limited to $1.00 per share annually under the facility, subject to stated conditions.
Material changes, outlook, and risks
- Wholesale sales fell $10.9 million. Cigarette carton volume and mix reduced sales by $16.4 million; manufacturer price increases added $6.2 million. Sales of other product categories declined $0.7 million.
- Retail sales declined $1.0 million: about $0.5 million reflected the closure of a Florida flagship store after its lease expired, partly offset by a replacement store; the balance was primarily lower sales at existing stores amid increased competition.
- Management cited heightened competition for convenience stores and health food retailers. It views wholesale foodservice and technology capabilities as potential advantages and is focused on organic growth and disciplined geographic expansion. Retail initiatives include new-store formats, selective renovations, merchandising, and branding. No quantitative financial guidance was provided.
- Key disclosed risks include cigarette and tobacco demand and regulation, excise-tax and manufacturer-price changes, competition, fuel and commodity costs, inventory and customer-credit risk, access to capital, and execution of retail-store or expansion plans. AMCON does not currently hedge interest-rate or fuel-cost exposure and said a sharp deterioration in operating conditions could affect revenue, collections, or bank credit access.
- The company repurchased 11,104 shares for approximately $1.0 million during the quarter; the board authorized an additional 50,000-share repurchase program in December. The common dividend was $0.18 per share. Preferred shares had converted to common shares in fiscal 2016, so year-over-year EPS comparisons also reflect changed share counts and preferred-dividend treatment.
Important facts for investors to verify
- Whether cigarette-volume declines continue and whether pricing offsets lost volume.
- Comparable-store sales and profitability trends in the retail segment, including results following the Florida store replacement.
- Cash-flow conversion and working-capital needs, particularly inventory purchases and customer collections.
- Facility availability, borrowing levels, covenant headroom, and refinancing needs before the July 2018 maturity.
- Effects of share repurchases, equity-based compensation, and the board’s new authorization on per-share results and liquidity.