AMCON Distributing Company — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2016; fiscal year ends September 30. Figures are unaudited. AMCON operates a wholesale consumer-products distribution business and 16 natural-food retail stores.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $296.4 million | $287.4 million | $618.5 million | $602.9 million |
| Gross profit | $17.5 million | $17.7 million | $36.5 million | $37.3 million |
| Gross margin | 5.9% | 6.2% | 5.9% | 6.2% |
| Operating income | $2.2 million | $1.7 million | $4.7 million | $4.4 million |
| Net income | $1.1 million | $0.8 million | $2.5 million | $2.3 million |
| Diluted EPS | $1.61 | $1.04 | $3.46 | $3.15 |
- Q2 sales rose 3.1%, while gross profit declined 1.1%; lower operating expenses helped operating income increase 32.4% and net income increase 49.0% year over year.
- For the six months, sales grew 2.6%, but gross profit fell 2.0%; lower operating expenses contributed to an 8.1% increase in net income.
- Wholesale sales increased 3.5% in Q2 and 2.9% for the half year, mainly from cigarette manufacturer price increases and growth in other product categories. Wholesale gross profit was nearly flat in Q2 and down 1.1% for the half year.
- Retail sales decreased 8.5% in Q2 and 7.5% for the half year, primarily due to increased competition. Retail gross profit declined 5.9% and 6.4%, respectively.
- Q2 sales include $88.7 million of excise taxes; six-month sales include $186.0 million. Sales are reported net of retailer incentives.
Cash flow, debt and liquidity
- Cash from operations was $7.4 million for the six months, versus cash used of $15.5 million in the prior-year period. The improvement chiefly reflected inventory: a $4.1 million source of cash versus a $21.9 million use previously.
- Capital spending was $0.7 million. Financing used $6.6 million, including $3.3 million of net credit-facility repayments, $2.5 million of share repurchases and $0.5 million of dividends. Cash increased $0.1 million to $0.3 million.
- At March 31, current assets were $91.5 million and current liabilities $25.0 million. The revolving facility had $17.6 million outstanding and $52.0 million available; the borrowing limit was $69.6 million, subject to eligible receivables and inventory. The facility matures July 2018 and bears interest at prime or LIBOR plus 125–175 basis points; the reported March rate was 2.48% in the debt note.
- Long-term debt, including current maturities, totaled approximately $3.6 million. The company reported no credit-covenant default; availability had not fallen below the level triggering the fixed-charge coverage test.
- Total assets were $114.6 million, down from $120.2 million at September 30, 2015. The company repurchased 30,719 shares for approximately $2.5 million during the six months.
Outlook, risks and other notable items
- No numerical earnings or revenue guidance is provided. Management described a disciplined, risk-adjusted growth strategy, continued focus on organic growth and possible acquisitions, and targeted investment in wholesale foodservice and technology capabilities.
- Retail initiatives include store refreshes, more solutions-oriented selling, broader higher-growth product categories, and efforts to increase customer frequency and basket size. Management cited online shopping and intensifying competition from natural-food chains and conventional grocers as pressures on retail sales.
- Risks identified include competition, tobacco regulation and excise-tax increases, cigarette and tobacco demand, commodity and fuel prices, manufacturer pricing and promotional changes, customer credit risk, inventory costs, and access to capital. The company does not hedge interest-rate or fuel-cost exposure and cautioned that a sharp operating-environment change could affect revenue, collections or bank credit access.
- The company stated that liquidity should be adequate to sustain operations. It reported no off-balance-sheet arrangements, no legal proceedings, and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective at period-end.
- A $0.4 million letter of credit supports the workers’ compensation self-insurance program. Preferred shares carry cumulative dividends and conversion rights; the CEO owns all Series A and half of Series B preferred shares.
Investor verification priorities
- Check whether wholesale sales growth translates into improved gross profit and margins, given the decline in consolidated gross margin and cigarette mix effects.
- Track retail comparable-store performance and whether the described initiatives stabilize sales amid competition.
- Review borrowing availability, collateral-based limits, facility terms and covenant headroom as working-capital needs change.
- Verify the impact of share repurchases, preferred-stock conversion and dividends on the common share count and per-share results.
- Compare actual results with management’s stated growth priorities and monitor tobacco, fuel, interest-rate and customer-credit exposures.