AMCON Distributing Company — Q3 FY2016 Form 10-Q
Reporting period: Three and nine months ended June 30, 2016; balance sheet compared with September 30, 2015. AMCON operates a wholesale consumer-products distribution business and 15 natural-food retail stores. Reported sales include cigarette and tobacco excise taxes.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $333.4 million | $334.5 million | $951.9 million | $937.3 million |
| Gross profit / margin | $19.2 million / 5.7% | $19.5 million / 5.8% | $55.7 million / 5.8% | $56.8 million / 6.1% |
| Operating income | $3.3 million | $3.6 million | $8.1 million | $8.0 million |
| Net income | $1.9 million | $2.0 million | $4.4 million | $4.3 million |
| Net income available to common shareholders | $1.8 million | $1.9 million | $4.2 million | $4.2 million |
| Basic / diluted EPS | $3.03 / $2.62 | $3.16 / $2.69 | $6.91 / $6.07 | $6.78 / $5.85 |
- Cash flow: Nine-month operating cash flow was $13.4 million, versus $2.6 million a year earlier. Inventory reductions provided $10.1 million of cash, compared with a $6.4 million use in the prior period. Investing cash outflow was $0.9 million, including $1.0 million of capital expenditures; financing cash outflow was $12.3 million. Cash increased $0.2 million to $0.4 million.
- Liquidity and debt: At June 30, cash was $0.4 million, current assets $91.9 million and current liabilities $29.0 million. Credit-facility borrowings were $13.7 million; $55.9 million of borrowing availability remained. The facility’s average interest rate was 2.71%. Credit facility plus current and long-term debt totaled approximately $17.2 million, down from approximately $24.6 million at September 30, 2015.
- Other balance-sheet and capital items: Shareholders’ equity was $62.2 million. The company repurchased 47,556 shares for approximately $4.0 million during the nine months. Common dividends paid were $0.82 per share for the period, versus $0.54 a year earlier. Preferred stock with a $2.9 million combined liquidation preference remained outstanding.
Changes versus comparable periods
- Q3 sales fell 0.3% and net income fell 7.2%; gross profit declined 1.7% and gross margin narrowed from 5.8% to 5.7%.
- For nine months, sales rose 1.5%, but gross profit fell 1.9% and gross margin narrowed from 6.1% to 5.8%. Operating expenses fell 2.4%, helping operating income rise 1.0%; net income rose 1.0%.
- Wholesale nine-month sales increased 1.9%, largely from cigarette price increases and stronger sales of other products, while cigarette carton volume and mix reduced sales and gross profit. Retail sales declined 10.1% for nine months amid competition and a store relocation.
- Retail Q3 sales decreased 15.5%. The company attributed about $0.7 million of the decline to closing a Florida store for relocation and $0.5 million to lower sales at remaining stores. It closed the store at lease expiry in May and expected the replacement location to open in fall 2016.
Outlook, risks and notable disclosures
- No quantitative earnings or revenue guidance was provided. Management said liquidity should be adequate to sustain operations and described the wholesale business as healthy, while noting industry headwinds and potential acquisition opportunities as distribution consolidates.
- Management plans store updates, tailored product offerings and new marketing in the retail segment. It cautioned that the relocation would continue to affect near-term results.
- Risks cited include competition, tobacco regulation and excise taxes, manufacturer pricing and promotional changes, fuel and commodity costs, customer credit risk, inventory carrying costs, and access to bank credit. The company does not hedge interest-rate or fuel-cost exposure.
- The revolving facility matures in July 2018, is secured by company assets, and includes a conditional fixed-charge-coverage covenant. Management reported that availability had not fallen below the covenant trigger and that the fixed-charge ratio exceeded 1.0. A $0.4 million workers’ compensation letter of credit was outstanding; no off-balance-sheet arrangements or legal proceedings were reported.
- Disclosure controls were deemed effective as of June 30, 2016; no material change in internal control over financial reporting was reported. Management noted that interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether lower cigarette carton volume and mix continue to pressure wholesale gross profit despite sales growth from price increases.
- Whether retail sales recover after the Florida store relocation and planned store and merchandising changes.
- Whether operating cash flow remains strong when inventory movements are less favorable, and how cash generation is allocated among debt reduction, buybacks and dividends.
- Current borrowing availability, covenant headroom and the terms of any future refinancing or facility renewal.
- The effects of tobacco regulation, taxes, competition and supplier pricing on sales, margins and customer demand.