Village Super Market, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the 13 weeks ended October 26, 2013; comparisons are with the 13 weeks ended October 27, 2012 unless otherwise noted. Amounts below are in millions of dollars except per-share data and percentages. Village operated 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Sales | $357.046 | $358.151 |
| Gross profit / margin | $93.706 / 26.24% | $95.637 / 26.70% |
| Operating income / margin | $6.249 / 1.75% | $10.472 / 2.92% |
| Income before taxes | $6.205 | $10.080 |
| Income tax expense | $13.036 | $4.225 |
| Net income (loss) | $(6.831) | $5.855 |
| Basic diluted EPS, Class A | $(0.55) | $0.52 basic; $0.42 diluted |
| Basic diluted EPS, Class B | $(0.36) | $0.30 |
Gross margin contracted 0.46 percentage points, mainly due to lower departmental margins as the company invested in lower prices. Operating and administrative expenses rose to 23.06% of sales from 22.41%, reflecting higher payroll, healthcare and insurance costs and replacement-store pre-opening expense.
Cash used in operations was $2.215, compared with $8.023 of cash provided a year earlier. Investing activities used $16.916, including $16.520 of capital expenditures; financing activities used $2.980, including $3.080 of dividends. Cash declined $22.111 during the quarter to $87.460.
At October 26, cash was $87.460 and working capital was $71.534, with a current ratio of 1.6, versus $94.299 and 1.8 at July 27, 2013. Capital and financing lease obligations totaled approximately $41.071; Wakefern notes payable totaled $2.858. The company also held a $22.817 Wakefern note receivable bearing 7% interest. Shareholders’ equity was $235.831.
Material changes and unusual items
- Sales declined 0.3%; same-store sales also fell 0.3%. Management attributed this to three competitor openings and unusually strong prior-year sales ahead of Hurricane Sandy. Excluding that storm-related comparison, same-store sales increased 0.9%.
- The net loss included a $10.052 tax charge related to an unfavorable New Jersey Tax Court ruling on historical tax disputes, including estimated tax, interest and penalties. The company is appealing; no payment is required until the dispute is finally resolved. Excluding this charge, management reported a 48.1% effective tax rate for the quarter. The prior-year quarter included $0.693 of after-tax credit-card lawsuit settlement income and a $0.376 after-tax landlord-dispute charge.
- Operating cash flow weakened, with lower earnings excluding the tax charge, a larger reduction in amounts payable to Wakefern, and inventory growth versus an inventory decline in the prior-year quarter.
- Capital expenditures increased to $16.520 from $5.792, primarily for two replacement-store projects. Village opened a 77,000-square-foot Hanover Township replacement store on November 6, 2013; the Morris Plains store closed in November.
Outlook, risks and contingencies
- Management forecast fiscal 2014 same-store sales growth of 0.5%–2.5%, modest retail price inflation and approximately $35 million of capital expenditures, including two replacement stores.
- Expected fiscal 2014 effective tax rate was 45.5%–46.5%; excluding interest and penalties related to unrecognized tax benefits, management expected 41.5%–42.5%.
- The Board’s stated intention was to continue quarterly dividends at the latest rates: $0.25 per Class A share and $0.1625 per Class B share. Management believed cash and operating cash flow would meet foreseeable working-capital, capital-expenditure and debt-payment needs.
- Management expected approximately $3 million of fiscal 2014 pension contributions; $64,000 had been contributed by quarter-end. It noted potential increases in healthcare and pension costs.
- Wakefern notified Village that it intended to prepay the $22.817 million, 7% note receivable on February 15, 2014.
- Recovery of Hurricane Sandy insurance claims remained unresolved; Wakefern had sued the insurer on behalf of its members, discussions were ongoing, and resolution expected during fiscal 2014 could materially affect results.
- The closed Morris Plains store carries approximately $2.5 million of remaining base rent. The company warned that unrecovered lease costs, net of estimated sublease income, could result in a charge when it ceases using the relevant properties.
- Key risks include intense price competition and narrow margins; economic weakness; underperformance of the Maryland stores; dependence on Wakefern; labor, healthcare and pension costs; food-safety exposures; possible asset impairments; and tax disputes.
Important facts for investors to verify
- Progress and outcome of the New Jersey tax appeal, including the related accrued tax, interest and penalty balances.
- Same-store sales, gross-margin recovery and performance of the Maryland stores amid competitive pricing pressure.
- Operating cash generation and funding of the $35 million capital plan and planned dividends.
- Timing and proceeds of the Wakefern note prepayment, and the outcome of the Hurricane Sandy insurance claim.
- Costs associated with replacement stores, closed-store leases, and pension and healthcare obligations.