Business Context and Reporting Period
Company: Weis Markets, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 26, 2011
Operations: The Company operates 162 retail food stores across Pennsylvania, Maryland, New Jersey, New York, and West Virginia. It is a single-segment retailer selling groceries, pharmacy services, fuel, and general merchandise.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Sales | $659,455,000 | $664,256,000 |
| Gross Profit | $178,504,000 | $179,698,000 |
| Gross Margin | 27.1% | 27.1% |
| Operating Income | $28,253,000 | $26,680,000 |
| Operating Margin | 4.3% | 4.0% |
| Net Income | $18,601,000 | $17,382,000 |
| Earnings Per Share (Diluted) | $0.69 | $0.65 |
| Cash from Operations | $32,258,000 | $41,808,000 |
| Cash and Equivalents (End of Period) | $88,387,000 | $90,146,000 |
| Capital Expenditures | $22,728,000 | $12,488,000 |
Liquidity & Debt: The Company reported no long-term debt on the balance sheet. Total current liabilities were $181,395,000. Outstanding letters of credit totaled $15.1 million. The Company maintains a cash and marketable securities position of approximately $139 million ($88.4M cash + $50.6M securities).
Material Changes vs. Prior Period
- Revenue: Net sales decreased 0.7% year-over-year. Comparable store sales increased 0.6%, but total sales were negatively impacted by the divestiture of 18 unprofitable SuperPetz units and two underperforming supermarkets.
- Profitability: Net income increased 7.0% to $18.6 million, driven by a 5.9% increase in operating income and an 84.6% increase in investment income.
- Cost Structure: Operating expenses decreased 1.8% to $150.3 million. Employee-related costs decreased 1.0%, and self-insured health care benefits dropped 15.5% due to lower utilization. However, diesel fuel costs rose 22.9% and snow removal costs increased by $292,000 due to severe weather.
- Cash Flow: Operating cash flow decreased 22.8% to $32.3 million. Investing cash outflows increased significantly to $45.2 million, primarily due to $27.7 million in purchases of marketable securities and $22.7 million in property and equipment.
Guidance, Outlook, and Risks
- Capital Expenditures: Management estimates a total investment of approximately $110.0 million for 2011 to fund new superstores, remodels, and technology upgrades.
- Promotional Strategy: The Company is utilizing "Price Freeze" and "Get Grillin' Weis" programs to maintain market share amidst cautious consumer spending and high unemployment.
- Cost Pressures: Management anticipates continued inflation in dairy sales and diesel fuel prices. There is uncertainty regarding the impact of the Patient Protection and Affordable Care Act on future operating expenses and the Durbin Amendment on debit card interchange fees.
- Contingencies: The Company is a defendant in a lawsuit regarding the "Fair and Accurate Credit Transactions Act." A settlement with a cap of $2,000,000 was preliminarily approved, and $750,000 has been accrued. If the settlement is not approved, future losses could exceed the accrued amount.
Investor Verification Checklist
- Verify the impact of the divestiture of 18 SuperPetz units and two supermarkets on future comparable store sales growth.
- Monitor the effectiveness of the "Price Freeze" program in maintaining gross margins against rising diesel fuel and commodity costs.
- Track the final court approval of the $2,000,000 capped settlement regarding the Fair and Accurate Credit Transactions Act lawsuit.
- Assess the Company's ability to fund the $110 million capital expansion program solely through internal cash flows without accessing credit facilities.
- Review future quarters for the anticipated 10% increase in health care benefit costs and the impact of the Affordable Care Act.