Business Context and Reporting Period
Weis Markets, Inc. filed this Form 10-Q for the 13 weeks ended March 28, 2015, compared with the 13 weeks ended March 29, 2014. The company operated 163 retail food stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia and reported one operating segment.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $712.4 million | $687.1 million | 3.7% |
| Gross profit | $195.1 million | $186.8 million | 4.5% |
| Gross margin | 27.4% | 27.2% | +20 bps |
| Operating income | $19.5 million | $22.3 million | (12.6%) |
| Operating margin | 2.7% | 3.2% | (50 bps) |
| Net income | $13.1 million | $14.8 million | (11.2%) |
| Net margin | 1.8% | 2.1% | (30 bps) |
| Diluted EPS | $0.49 | $0.55 | (10.9%) |
| Cash dividends per share | $0.30 | $0.30 | No change |
Comparable-store sales increased 3.4%, or 4.7% excluding fuel. Total store sales increased 3.7%, or 4.8% excluding fuel. Comparable fresh, meat and pharmacy sales increased 7.8%, 8.7% and 7.7%, respectively, while comparable fuel sales declined 33.8% because of lower gasoline prices.
Net cash provided by operating activities was $31.0 million, compared with $34.2 million in the prior-year quarter. Capital expenditures were $20.6 million versus $17.9 million, and investing activities used $28.8 million versus $17.2 million. Dividends paid were $8.1 million in both periods. Cash and cash equivalents were $17.1 million at March 28, 2015, down from $23.0 million at December 27, 2014. Marketable securities were $80.5 million, and the SERP investment was $10.0 million.
Total assets were $1.187 billion and total liabilities were $324.4 million at quarter-end. Shareholders’ equity was $862.9 million. The filing does not clearly report outstanding long-term debt or borrowings. Weis had a $30 million line of credit, with $19.9 million committed to letters of credit; management did not anticipate drawing on the facility.
Material Changes Versus the Prior Comparable Period
- Sales and gross profit increased, with gross margin improving because the sales mix shifted from lower-margin fuel toward grocery products.
- Operating, general and administrative expenses rose 6.8% to $175.6 million, exceeding sales growth and reducing operating margin.
- Employee-related costs increased $7.7 million, or 7.9%; self-insured healthcare costs increased $3.1 million, or 94.9%.
- Depreciation and amortization increased to $17.3 million from $16.1 million as the company expanded capital investment.
- Q1 2014 included a $1.7 million pretax gain on the sale of property; no comparable property sale occurred in Q1 2015.
- Investment income declined 29.3% to $532,000, primarily because a stock dividend received in the prior-year quarter did not recur.
- The effective tax rate decreased to 34.6% from 36.0%, partly because of a discrete state depreciation deferred-tax-asset item.
Guidance, Outlook, Risks and Unusual Items
Management estimated that its 2015 capital expansion program would require approximately $91.8 million, including new stores, remodels, site acquisitions, technology and distribution and transportation upgrades. The program was expected to be funded through cash and investment reserves and internally generated operating cash flow. The company was considering a credit facility to support future financing activities.
Management remained confident in sales growth but highlighted intense competition, including competitors with greater financial resources. Other risks include food and fuel price volatility, labor and minimum-wage increases, healthcare costs and the impact of the Affordable Care Act, utility expenses, economic conditions, regulatory changes, technology, price pressure and future borrowing costs. Management expected diesel prices to remain fairly steady through the second quarter of 2015.
The company declared a quarterly dividend of $0.30 per share payable May 18, 2015. The board’s authorization to repurchase up to one million shares had 752,468 shares remaining. The filing states that there were no material subsequent events, no material changes in market risk and no material changes to internal control over financial reporting.
New revenue-recognition guidance under ASU 2014-09 was deferred to fiscal 2018; the company was evaluating its impact. Adoption of the discontinued-operations guidance had no impact on the current financial statements.
Investor Verification Items
- Verify whether sales growth and comparable-store performance continued after the quarter, particularly excluding fuel.
- Assess whether labor, healthcare and other operating costs continued to outpace revenue growth and pressure margins.
- Reconcile the planned $91.8 million capital program with operating cash flow, investment reserves and any future borrowing.
- Review the composition, maturities and valuation risk of the $80.5 million marketable-securities portfolio.
- Confirm the company’s actual debt or borrowing position, since the filing provides a credit-line and letter-of-credit disclosure but no clear outstanding-debt balance.
- Monitor fuel prices, food inflation or deflation, competitive pricing and regulatory or minimum-wage developments.