Ingles Markets, Inc. — Fiscal 2017 First-Quarter Form 10-Q
Reporting period: 13 weeks ended December 24, 2016; comparative quarter ended December 26, 2015. Unaudited results. Ingles operated 202 supermarkets across six southeastern states and reported retail grocery sales as its primary business, with fluid dairy and shopping-center rentals included in “Other.”
Key financial results
| Metric | Quarter ended Dec. 24, 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $982.8 million | $951.1 million | +3.3% |
| Gross profit / margin | $237.1 million / 24.1% | $225.6 million / 23.7% | Profit +5.1%; margin +0.4 percentage points |
| Operating and administrative expenses | $206.3 million | $194.1 million | +6.3%; 21.0% of sales versus 20.4% |
| Income from operations | $32.2 million | $31.6 million | +1.7%; 3.3% of sales in both periods |
| Interest expense | $11.3 million | $12.0 million | Down $0.7 million |
| Net income | $13.8 million | $13.0 million | +6.5%; 1.4% of sales in both periods |
| Class A EPS, basic / diluted | $0.70 / $0.68 | $0.66 / $0.64 | Higher |
| Class B EPS, basic / diluted | $0.64 / $0.64 | $0.60 / $0.60 | Higher |
| Cash from operations | $17.2 million | $6.5 million | Up $10.7 million |
| Capital expenditures | $29.3 million | $40.6 million | Down $11.4 million |
Business performance and changes
- Comparable grocery sales excluding gasoline rose 1.8%. Excluding gasoline, customer transactions increased 2.2% and average transaction size rose 0.4%.
- Gasoline sales increased with a 6.9% rise in average selling price per gallon and a 2.0% increase in gallons sold. Total retail sales grew 3.4% to $947.6 million; “Other” revenue was $35.2 million.
- Gross profit improved on higher sales and stronger margins in most categories. Excluding gasoline, grocery gross margin increased 50 basis points.
- Expense growth exceeded sales growth. Salaries and wages rose $7.0 million, with management citing additional labor hours and increased competition for labor. Repairs and maintenance, bank charges, and depreciation also increased; advertising expense decreased.
- A $1.4 million gain on asset sales/disposals, versus $0.1 million a year earlier, largely reflected vehicle upgrades in distribution operations.
Cash, debt, and liquidity
- At December 24, cash and equivalents were $15.2 million, current assets $456.5 million, and current liabilities $244.5 million. Inventory was $352.6 million.
- Total debt was approximately $900.2 million, compared with $924.8 million at December 2015. Debt included $700 million of 5.75% senior notes due 2023. Interest expense declined year over year.
- The $175 million revolving line matures in June 2018; $25.0 million was drawn at quarter-end. The company also reported $10.2 million of unused letters of credit issued against a $30 million letter-of-credit allowance.
- Quarterly operating cash flow was affected by seasonal inventory growth and semiannual senior-note interest payments. Cash from financing was $20.2 million, including net short-term borrowing activity.
- The company said it was in compliance with debt covenants and could incur approximately $382 million of additional borrowings under the most restrictive covenant. Management believed available financing and internally generated funds would cover foreseeable operating and capital needs, while noting financing might not be available on acceptable terms.
Outlook, risks, and other notable matters
- Fiscal 2017 capital expenditure plans were approximately $100–$140 million; management expected annual spending of approximately $100–$160 million going forward to maintain and modernize stores. Quarter-end construction commitments were $3.0 million.
- Management expected to continue regular quarterly dividends, subject to board approval, financial results, and debt restrictions. The quarter’s declared per-share dividends were $0.165 for Class A and $0.150 for Class B.
- Management identified competition, regional economic conditions, gasoline prices, labor and utility costs, weather effects on food supply and delivery, financing availability, and execution of store expansion and remodeling as risks. Grocery sales are seasonal, with the first fiscal quarter typically stronger around Thanksgiving and Christmas.
- Self-insurance reserves totaled $36.7 million, including $14.2 million current and $22.5 million long-term liabilities; estimates for claims incurred but not reported may fluctuate. The company self-insures certain property and business-interruption losses.
- Management reported no asset impairments in the quarter and no material changes in contractual obligations or market-risk factors. It was evaluating the effects of new lease and revenue-recognition accounting standards.
- A material weakness identified at September 24, 2016, involving review and approval of vendor bank-account changes, was reported as remediated by December 24, 2016. Management concluded disclosure controls were effective at quarter-end.
Investor verification priorities
- Review comparable-store trends excluding gasoline and assess the sustainability of improved grocery margins.
- Track operating expense growth, particularly labor, maintenance, and payment-processing costs, against sales growth.
- Verify debt balances, revolving-credit availability, covenant headroom, and refinancing needs as maturities approach.
- Monitor capital spending against the $100–$140 million fiscal 2017 plan and evaluate returns from new, remodeled, and replacement stores.
- Assess cash generation, seasonal working-capital requirements, self-insurance reserves, and the board’s ability to sustain dividends.
- Confirm ongoing effectiveness of the remediated vendor bank-account control and the eventual financial-statement effects of new accounting standards.