Weis Markets, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Weis Markets operates 206 supermarkets in Pennsylvania and six surrounding states, with more than 23,000 associates. The filing covers the 13 and 26 weeks ended June 30, 2018, compared with the periods ended July 1, 2017. The company reports one operating segment.
Financial Performance and Position
| Metric | 13 Weeks Ended June 30, 2018 | 13 Weeks Ended July 1, 2017 | 26 Weeks Ended June 30, 2018 | 26 Weeks Ended July 1, 2017 |
|---|---|---|---|---|
| Net sales | $871.1 million | $876.6 million | $1,747.2 million | $1,728.8 million |
| Gross profit | $240.3 million | $233.8 million | $475.2 million | $462.8 million |
| Gross margin | 27.6% | 26.7% | 27.2% | 26.8% |
| Operating income | $26.0 million | $27.7 million | $48.9 million | $48.0 million |
| Operating margin | 3.0% | 3.2% | 2.8% | 2.8% |
| Net income | $19.1 million | $18.5 million | $35.3 million | $30.3 million |
| Diluted EPS | $0.71 | $0.69 | $1.31 | $1.13 |
For the first half, operating cash flow was $84.2 million versus $63.3 million in the prior-year period. Capital expenditures were $46.4 million versus $40.3 million, and dividends paid were $16.1 million in both periods. Cash and cash equivalents were $34.6 million at June 30, 2018, compared with $47.9 million at December 30, 2017.
The company had no outstanding borrowings under its $100.0 million revolving credit facility at quarter-end. The facility also had $14.4 million of letters of credit outstanding and $85.6 million of unused availability. Total marketable securities were $58.7 million, and shareholders’ equity was $1.01 billion.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 0.6%, while first-half sales increased 1.1%. Excluding fuel, sales declined 1.3% in the quarter and increased 0.5% for the first half.
- Holiday timing adversely affected second-quarter comparisons. Management estimated an approximately $12.5 million incremental holiday-sales impact in the comparable-store calculation.
- First-half comparable-store sales increased 0.7% on an adjusted basis, or 0.2% excluding fuel. Comparable fuel sales increased 11.3% for the first half.
- Gross margin improved 0.9 percentage points in the quarter and 0.4 percentage points for the first half, supported by price optimization, inventory management, fresh-product sell-through and private-brand initiatives.
- Operating expenses increased 4.0% in the quarter and 2.8% for the first half. Higher employee-related costs, incentive accruals, health-care claims and depreciation contributed to the increase.
- The effective tax rate declined to 27.0% in the quarter and 27.2% for the first half, from 34.3% and 38.4%, respectively, primarily because of the Tax Cuts and Jobs Act reduction in the federal corporate tax rate.
- The company repaid $35.0 million of revolving debt during the first half, eliminating the outstanding balance. Prior-year debt repayments were $12.5 million.
- Adoption of the new equity-investment accounting standard reduced first-half reported investment results by approximately $1.2 million, including an unrealized equity-securities loss. The company also reclassified $5.5 million of accumulated unrealized gains to retained earnings with no effect on total equity.
Guidance, Outlook, Risks and Unusual Items
- Management planned approximately $85.5 million of 2018 capital investment, including new stores, remodels, technology and distribution and transportation upgrades.
- Management expects operating cash flow and available revolver capacity to fund working capital, capital expenditures, acquisitions, debt requirements and dividends.
- The acquired store group was generating positive cash flow in the quarter, while management expected acquisition-related cost pressures to lessen as the stores are assimilated. No acquisitions were pending, although opportunities continued to be evaluated.
- The Board approved a quarterly dividend of $0.30 per share payable August 13, 2018. Future dividends remain subject to quarterly Board approval and company performance.
- Management anticipates product-cost inflation, particularly in pharmacy, and noted that self-insured health-care claim volume and severity had increased. Non-cash LIFO adjustments changed from $0.6 million of income in the prior-year first half to $1.4 million of expense in 2018.
- The company identified competition from larger retailers, price pressures, economic conditions, regulatory changes, technology and retail-industry conditions as risks. No material changes in market risk were reported.
- The company expects adoption of the new lease standard to have a significant impact on the balance sheet. The filing states that no material subsequent events required disclosure.
Investor Verification Checklist
- Verify the sustainability of first-half comparable-store sales and gross-margin improvement after adjusting for holiday timing and fuel inflation.
- Assess whether higher labor, health-care, incentive and depreciation costs continue to pressure operating margins.
- Monitor the $85.5 million capital program, new-store performance and the cash impact of future expansion.
- Review liquidity after dividends and capital expenditures, including the September 2019 revolver maturity and $14.4 million of letters of credit.
- Evaluate the effect of equity-market movements on investment income and the impact of the upcoming lease-accounting adoption on reported leverage and assets.