Ingles Markets, Inc. — Q3 FY2019 Form 10-Q
Business context and period. The unaudited quarter and first nine months of fiscal 2019 ended June 29, 2019 (13 and 39 weeks, respectively). Ingles operated 199 supermarkets across six Southeastern states, plus 108 in-store pharmacies and 104 fuel centers; it also operates a dairy business and earns shopping-center rental income.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | 9M FY2019 | 9M FY2018 |
|---|---|---|---|---|
| Net sales | $1,062.3 million | $1,034.8 million | $3,125.9 million | $3,033.1 million |
| Gross profit / margin | $258.9 million / 24.4% | $243.9 million / 23.6% | $761.7 million / 24.4% | $723.7 million / 23.9% |
| Operating income / margin | $43.4 million / 4.1% | $29.8 million / 2.9% | $113.6 million / 3.6% | $89.2 million / 3.0% |
| Income before taxes | $31.8 million | $18.5 million | $79.2 million | $56.1 million |
| Income tax expense (benefit) | $8.3 million | ($6.0) million | $18.5 million | ($22.9) million |
| Net income | $23.5 million | $24.5 million | $60.7 million | $78.9 million |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $144.5 million | $107.6 million |
| Capital expenditures | Not presented for quarter | Not presented for quarter | $123.2 million | $120.5 million |
- Q3 sales increased 2.7%; nine-month sales rose about 3.1%. Excluding gasoline, comparable grocery-store sales rose 4.3% in Q3 and 3.9% for nine months. In the quarter, customer transactions increased slightly and average transaction size grew 3.6% (excluding gasoline); for nine months, they increased 0.9% and 2.9%, respectively.
- Q3 diluted EPS was $1.16 for Class A and $1.08 for Class B, versus $1.21 and $1.13. Nine-month diluted EPS was $2.99 and $2.80, versus $3.90 and $3.64.
- At June 29, cash was $18.6 million, total assets $1.839 billion, and stockholders’ equity $645.4 million. Current assets were $475.7 million and current liabilities $231.3 million.
- Total debt was approximately $854.7 million, including $12.9 million current and $841.8 million long-term, compared with $865.6 million at September 29, 2018. The $175 million revolving credit line had no borrowings outstanding; $9.7 million of letters of credit had been issued. The company reported compliance with debt covenants.
- Nine-month cash from operations increased to $144.5 million, which management attributed primarily to higher pretax income and cash income-tax refunds. Investing used $115.0 million; financing used $21.5 million. Cash increased $8.0 million to $18.6 million.
Changes, outlook and risks
- Q3 pretax income rose 72.3%, but net income declined because Q3 FY2018 included a $6.0 million income-tax benefit from tax calculation changes. For the nine-month comparison, pretax income rose 41.2%, while net income fell because FY2018 included $37.3 million of tax benefits related to tax-law changes and tax calculation methods. FY2019’s nine-month effective tax rate was 23.4%.
- Gross margin improved; management cited stronger grocery margins and higher gasoline gross-profit dollars. Operating and administrative costs rose 0.8% in Q3 and 2.6% for nine months. Wage and maintenance costs increased; insurance and advertising expenses decreased in Q3, while card-processing fees increased over nine months.
- Gasoline sales declined as both gallons sold and average selling price fell. Q3 comparisons were also affected by Easter timing: Easter fell in April 2019 versus March 2018. The company recognized a $3.2 million gain on sale of a former store property during the nine-month period.
- FY2019 capital expenditure plans were approximately $140–$180 million; management expects net annual capital expenditures of approximately $100–$160 million going forward. Spending supports new stores, remodels, fuel centers, equipment, technology, and dairy operations. Management expects liquidity and financing sources to cover planned capital and working-capital needs, but notes financing may not be available on acceptable terms.
- Sales outlook depends on economic conditions, inflation, gasoline and raw-milk prices, and maturation of new and remodeled stores. Cited risks include competition, labor and utility costs, weather-related food supply impacts, financing availability, and execution of expansion and real-estate plans. The company expects regular quarterly dividends to continue, subject to board discretion, results, and debt restrictions.
- A $50 million interest-rate swap hedges floating-rate debt; its fair-value liability was $1.2 million, with a $0.9 million nine-month after-tax loss recorded in other comprehensive income. The company had $31.0 million in self-insurance liabilities. Management said pending ordinary-course legal matters were not expected to materially affect the company. Lease-accounting adoption was planned for fiscal 2020; its impact was still being evaluated.
Important facts for investors to verify
- How much of sales and margin growth reflects comparable-store performance versus Easter timing, gasoline trends, and store openings or closures.
- The sustainability of improved gross and operating margins alongside wage, maintenance, and payment-processing cost pressures.
- Normalized earnings and cash generation after excluding prior-year tax benefits and considering the timing of current-year tax refunds.
- Planned capital spending, debt service, covenant restrictions, and the availability and cost of financing.
- Exposure to self-insurance estimates, fuel supply contract terms, and the interest-rate swap; the filing reports no material legal contingency but does not quantify possible ultimate legal liability.