Weis Markets, Inc. 2019 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Weis Markets operates 198 supermarkets in Pennsylvania and six surrounding states, with approximately 22,000 associates. The filing covers the 13 weeks ended September 28, 2019, compared with the 13 weeks ended September 29, 2018, and the 39 weeks ended September 28, 2019, compared with the same period in 2018.
Key Financial Metrics
| Metric | 13 Weeks 2019 | 13 Weeks 2018 | 39 Weeks 2019 | 39 Weeks 2018 |
|---|---|---|---|---|
| Net sales | $876.2 million | $869.1 million | $2.641 billion | $2.616 billion |
| Gross profit | $232.8 million | $232.3 million | $699.0 million | $707.5 million |
| Gross margin | 26.6% | 26.7% | 26.5% | 27.0% |
| Operating income | $17.5 million | $17.5 million | $59.4 million | $66.4 million |
| Operating margin | 2.0% | 2.0% | 2.2% | 2.5% |
| Net income | $14.3 million | $14.2 million | $49.1 million | $49.5 million |
| Diluted EPS | $0.53 | $0.53 | $1.83 | $1.84 |
Comparable-store sales increased 1.7% in the quarter and 1.5% year to date, including fuel. Excluding fuel, comparable-store sales increased 1.7% in both periods. Pharmacy sales increased year over year, while fuel sales declined modestly year to date.
Net cash provided by operating activities was $140.0 million, compared with $112.1 million in the prior-year period. Capital expenditures were $70.1 million versus $64.5 million. Dividends paid were $25.0 million versus $24.2 million. Cash and cash equivalents increased to $76.6 million from $37.8 million at year-end 2018.
The company reported $60.5 million of marketable securities. It had no long-term debt payments during the first 39 weeks of 2019 and paid only $43 thousand of long-term-debt interest. Its unsecured revolving credit facility provides for $30.0 million of aggregate principal capacity, plus an additional discretionary $70.0 million; availability was $18.5 million after $11.5 million of outstanding letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales increased 0.8% in the quarter and 0.9% year to date, but year-to-date gross profit decreased 1.2% and operating income decreased 10.6%.
- Year-to-date gross margin declined 50 basis points to 26.5%, reflecting pressure from fuel, fruits, vegetables, eggs and pharmacy industry practices. Product-cost trends and a $1.2 million favorable non-cash LIFO adjustment also affected results.
- Operating, general and administrative expenses decreased 0.2% year to date despite higher sales, supported by store closures, labor efficiencies, lower utilities costs and other cost-saving initiatives.
- Investment income increased materially, partly because of unrealized gains in equity securities. Investment income and interest expense totaled $5.4 million year to date versus $0.7 million in the prior-year period.
- The company adopted ASC 842, Leases, on December 30, 2018. Adoption added approximately $202 million of operating lease right-of-use assets and $211 million of lease liabilities to the balance sheet, without a significant effect on earnings or cash flows.
- Three stores from the acquired store group were closed during the first 39 weeks. On September 30, 2019, the company announced the purchase of two former Thomas’ Foods locations, with a planned reopening of the Dallas, Pennsylvania location in the fourth quarter.
Guidance, Outlook, Risks and Unusual Items
Management planned to invest approximately $86 million in capital expansion during 2019, including new stores, remodels, technology, distribution facilities and transportation equipment. Management expects operating cash flow and available credit to fund working capital, capital expenditures, acquisitions and dividends.
The company expects product costs to continue declining in the coming quarter, which management expects could produce additional favorable LIFO income. It also expects to continue regular quarterly dividends, although future declarations remain subject to board approval and operating and financial conditions. No formal earnings guidance was provided.
Management identified risks from intense retail competition, price pressures, general economic conditions, regulatory changes, technology and changing pharmacy-industry practices. Results may also be affected by commodity inflation or deflation, fuel prices, customer buying patterns, labor costs and the performance of acquired stores. The filing states that operating results for the interim period are not necessarily indicative of full-year results.
Important Facts for Investors to Verify
- Whether comparable-store sales growth can offset continued gross-margin and pharmacy profitability pressure.
- The sustainability of unusually strong operating cash flow, particularly the benefit from inventory reductions and faster vendor collections.
- Actual 2019 capital expenditures versus the approximately $86 million plan and the impact of store closures and new acquisitions.
- The liquidity impact of operating lease obligations, which had a present value of approximately $203.2 million before sublease offsets.
- The volatility and recurring nature of investment income, including unrealized equity-security gains.
- Availability and utilization of the revolving credit facility, including the $11.5 million of letters of credit.
- Future dividend declarations and any potential share repurchases under the authorization covering 752,468 remaining shares.