AMCON Distributing Company — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016; comparisons are with fiscal 2015. AMCON operates a wholesale consumer-products distribution business and 16 natural-food retail stores. Wholesale accounted for $1.267 billion of sales; retail accounted for $27.4 million. Cigarettes were 72% of consolidated revenue.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Sales | $1,294.6 million | $1,281.9 million |
| Gross profit / margin | $74.8 million / 5.8% | $76.6 million / 6.0% |
| Operating income | $10.9 million | $11.5 million |
| Net income | $6.0 million | $6.4 million |
| Net income available to common shareholders | $5.8 million | $6.2 million |
| Diluted EPS | $8.38 | $8.59 |
| Cash from operating activities | $18.4 million | $(2.6) million |
| Capital expenditures | $1.6 million | $1.0 million |
Revenue rose 1.0%, while gross profit declined 2.3%; gross margin fell 0.2 percentage points. SG&A and depreciation/amortization totaled $63.9 million, down $1.1 million. Interest expense was $0.7 million, down from $0.8 million.
At year-end, cash was $0.6 million and current assets were $89.3 million against current liabilities of $28.9 million. The revolving facility had $10.5 million outstanding and $59.1 million available, subject to borrowing-base limits. Total credit-facility and long-term debt was approximately $13.9 million, down from $24.6 million. The facility limit was $70 million, with a July 2018 maturity; real-estate debt was $3.4 million. The company reported no off-balance-sheet arrangements.
Changes and notable items
- Wholesale sales increased $16.7 million: cigarette price increases and growth in other product categories more than offset a $16.4 million decline from cigarette volume and mix. Wholesale gross profit fell $0.5 million.
- Retail sales declined $3.9 million, reflecting a Florida store relocation/closure and weaker sales at remaining stores amid increased competition. Retail operating income fell to $51,749 from $661,835.
- Operating cash flow improved by $21.0 million year over year, driven substantially by a $12.4 million inventory cash inflow, compared with a $17.2 million inventory outflow in FY2015. Prepaid and other current assets increased $6.5 million, primarily due to prepaid inventory.
- AMCON repurchased 56,391 shares for $4.8 million and paid $1.00 per common share in dividends, up from $0.72. Series A and B preferred shares converted into 98,707 common shares during the year; the CEO held all Series A and half of Series B before conversion.
- In fiscal Q4, AMCON opened a new flagship Florida store replacing its prior flagship location. In October 2016, the board renewed authorization to repurchase up to 50,000 shares.
Outlook, risks and contingencies
No numerical earnings or revenue guidance is provided. Management describes a strategy of prioritizing liquidity in the short term, reducing debt and investing in technology, foodservice and retail in the medium term, and pursuing organic growth and acquisitions over the longer term. Wholesale priorities include expanding foodservice, customer technology and geographic reach; retail initiatives include new-store formats, store reimaging, merchandising improvements and enhanced branding.
Management expects industry consolidation and intense competition to pressure wholesale margins and cites competitive expansion and online shopping as challenges for the retail segment. Key risks include cigarette dependence and declining cigarette volumes, tobacco regulation and excise taxes, supplier and manufacturer promotional changes, customer credit exposure, fuel costs, competition, labor and healthcare expenses, technology/cybersecurity, and access to capital. The credit facility contains financial and dividend restrictions; a default could trigger cross-default provisions on real-estate debt. AMCON noted no legal proceedings and no material environmental compliance costs. Operating lease commitments totaled $21.4 million; self-insured claim liabilities were $1.3 million.
Management said liquidity should be adequate to sustain operations but warned that a sharp deterioration in operating conditions could affect revenue, collections and bank credit. The financial statements received an unqualified audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an ICFR attestation.
Investor verification priorities
- Assess whether cigarette volume declines and tobacco-related concentration can be offset by other wholesale categories and services.
- Verify the sustainability of FY2016 operating cash flow, including the large inventory reduction and rise in prepaid inventory.
- Track retail comparable-store performance, the relocated Florida flagship store and execution of retail turnaround initiatives.
- Review borrowing-base availability, facility covenants and cross-default terms alongside debt reduction and shareholder returns.
- Examine the preferred-stock conversion, CEO ownership and related-party disclosures, and the effects of repurchases and equity awards on per-share results.