Business Context and Reporting Period
Weis Markets, Inc. operates 162 retail food stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia, supported by distribution, transportation and manufacturing operations. The company reports one operating segment. This unaudited Form 10-Q covers the 13 and 26 weeks ended June 25, 2011, compared with June 26, 2010.
Key Financial Metrics
| Metric | 13 Weeks Ended June 25, 2011 | 13 Weeks Ended June 26, 2010 | 26 Weeks Ended June 25, 2011 | 26 Weeks Ended June 26, 2010 |
|---|---|---|---|---|
| Net sales | $676.7 million | $653.7 million | $1,336.1 million | $1,317.9 million |
| Gross profit | $182.7 million | $184.4 million | $361.2 million | $364.1 million |
| Gross margin | 27.0% | 28.2% | 27.0% | 27.6% |
| Income from operations | $31.7 million | $32.5 million | $59.9 million | $59.2 million |
| Operating margin | 4.7% | 5.0% | 4.5% | 4.5% |
| Net income | $20.7 million | $20.5 million | $39.3 million | $37.9 million |
| Basic and diluted EPS | $0.77 | $0.76 | $1.46 | $1.41 |
| Cash dividends per share | $0.29 | $0.29 | $0.58 | $0.58 |
For the first half of 2011, operating cash flow was $62.8 million versus $76.6 million in the prior-year period. Investing cash outflow was $85.5 million, including $47.4 million of property and equipment purchases and $50.0 million of marketable securities purchases. Financing cash outflow was $15.6 million, consisting solely of dividends.
At June 25, 2011, cash and cash equivalents were $70.8 million and marketable securities were $68.3 million. Total assets were $1.007 billion, total liabilities were $255.0 million and shareholders’ equity was $752.0 million. No debt balance is reported on the consolidated balance sheet; the filing does not identify a drawn credit facility. Outstanding letters of credit were $13.6 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 3.5%; first-half sales increased 1.4%.
- Comparable-store sales increased 5.1% in the second quarter and 2.8% year to date. Total sales were affected by the divestiture of 18 SuperPetz stores and two supermarkets.
- Gross margin declined to 27.0% from 28.2% in the second quarter and to 27.0% from 27.6% year to date, reflecting product and fuel cost pressures.
- Operating and general administrative expenses declined 0.6% in the quarter and 1.2% year to date, improving expense ratios to 22.3% and 22.5%, respectively.
- First-half net income rose 3.7% and EPS rose 3.5%, despite lower gross profit, supported by lower operating expenses and higher investment income.
- Diesel fuel costs increased 30.9% in the second quarter and 27.0% year to date. Capital expenditures increased to $47.4 million from $22.7 million.
- Cash declined by $38.3 million during the first half, primarily because investing outflows exceeded operating cash generation.
Guidance, Outlook, Risks and Unusual Items
- Management estimates approximately $100 million of 2011 capital investment, while remaining committed to a previously reported $110 million capital expansion program; project timing shifted some spending into 2012.
- The company expects slightly higher diesel fuel prices through the remainder of 2011 and 2012 and expects health care benefit costs to increase approximately 10% in 2011.
- Management expects higher investment returns from marketable securities during 2011 and expects dairy sales to continue increasing at least through the third quarter.
- Promotional programs included “Get Grillin’ Weis,” “Price Freeze” and “Gas Rewards.” The seventh “Price Freeze” program began July 10, 2011.
- Key risks include weak economic conditions, unemployment, food and fuel inflation, competitive pricing pressure, utility and employee costs, regulatory changes including health care legislation and debit-card interchange rules, and competition from larger retailers.
- A lawsuit under the Fair and Accurate Credit Transactions Act was settled for a court-approved amount capped at $2.0 million. The company accrued $750,000 in first-quarter 2011 operating expenses as its best estimate of settlement-related expenditures.
- The company approved a quarterly dividend of $0.29 per share payable August 1, 2011. Its stock repurchase authorization had 752,468 shares remaining.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor Verification Items
- Reconcile the $100 million current capital spending estimate with the previously stated $110 million program and monitor timing of projects shifted to 2012.
- Assess whether fuel, food, labor and health care inflation continues to pressure gross margins and earnings.
- Review the sustainability of comparable-store sales growth given promotional activity, cautious consumer spending and the prior store divestitures.
- Verify the ultimate cost and resolution of the credit-transactions lawsuit settlement, including amounts exceeding the $750,000 accrual if any.
- Monitor liquidity after capital expenditures, marketable securities purchases and dividend payments, including the status of any potential credit facility.