Weis Markets, Inc. 2014 Q3 Form 10-Q Summary
Business context and reporting period
Weis Markets operated 163 retail food stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia as of September 27, 2014. The company also operated a distribution facility, transportation fleet and three manufacturing facilities. Operations are reported as one segment. This Form 10-Q covers the 13 and 39 weeks ended September 27, 2014, compared with the periods ended September 28, 2013.
Financial performance and liquidity
| Metric | 13 weeks ended Sept. 27, 2014 | 13 weeks ended Sept. 28, 2013 | 39 weeks ended Sept. 27, 2014 | 39 weeks ended Sept. 28, 2013 |
|---|---|---|---|---|
| Net sales | $683.9 million | $661.4 million | $2,062.9 million | $2,006.2 million |
| Gross profit | $185.7 million | $182.8 million | $560.1 million | $564.2 million |
| Gross margin | 27.2% | 27.6% | 27.2% | 28.1% |
| Income from operations | $19.9 million | $17.8 million | $61.7 million | $86.4 million |
| Operating margin | 2.9% | 2.7% | 3.0% | 4.3% |
| Net income | $13.7 million | $11.7 million | $41.3 million | $56.0 million |
| Diluted EPS | $0.51 | $0.43 | $1.53 | $2.08 |
| Operating cash flow | Not provided | Not provided | $91.7 million | $109.0 million |
Third-quarter sales increased 3.4%, while year-to-date sales increased 2.8%. Comparable-store sales increased 2.6% in the quarter and 1.4% year-to-date; excluding fuel, comparable-store sales increased 2.2% and 1.1%, respectively.
At September 27, 2014, cash and cash equivalents were $25.2 million, marketable securities were $69.2 million and total current assets were $406.6 million. Total liabilities were $306.7 million and shareholders’ equity was $852.3 million. The filing does not report outstanding long-term debt. The company had a $30 million line of credit, with $18 million committed to letters of credit, and stated that it did not anticipate drawing on the facility.
For the first 39 weeks, investing cash outflows were $60.2 million, including $58.0 million of property and equipment purchases. Financing cash outflows were $24.2 million, consisting entirely of dividends. Cash increased by $7.3 million from the beginning of the year.
Material changes versus the prior comparable period
- Third-quarter net income increased 17.2% and diluted EPS increased 18.6%, primarily reflecting higher sales, lower relative operating expenses and a lower effective tax rate.
- Year-to-date net income declined 26.3% and diluted EPS declined 26.4%, despite higher sales, because gross margin contracted, operating expenses increased and prior-year results included favorable items.
- Year-to-date gross margin decreased to 27.2% from 28.1%, primarily due to lower pricing initiatives, including Everyday Lower Prices, Lowest Price Guarantee, Price Freeze and Get Grillin’ programs.
- Year-to-date operating expenses increased 4.3%, compared with sales growth of 2.8%. Depreciation and amortization increased to $49.5 million from $42.8 million due to the company’s capital expansion program.
- Third-quarter 2013 operating expenses included a $6.1 million estimated separation charge related to the former chief executive officer. Third-quarter 2013 also included a $2.1 million impairment charge for four properties. These charges did not recur in 2014.
- Investment income declined 68.4% in the quarter and 55.1% year-to-date because of fewer equity-security sales and lower SERP investment results.
- The effective tax rate decreased to 32.5% from 38.4% in the quarter and to 35.0% from 38.0% year-to-date, partly because prior-year one-time permanent tax differences did not recur.
Guidance, outlook, risks and unusual items
Management estimated that its current 2014 development plans would require approximately $77.0 million of investment, reduced from the previously reported $101.0 million because certain project completion dates shifted into 2015. The company expects to fund working capital and capital expenditures through cash and investment reserves and internally generated operating cash flow.
Management cited pricing initiatives, sales-building programs, improved in-stock conditions, operational efficiencies and targeted customer programs as contributors to sales growth. Stronger third-quarter comparable sales were reported in pharmacy, food service, seafood, fresh and meat categories. Pharmacy sales also benefited from price inflation and a 3.7% increase in prescriptions during the quarter.
Key risks include intense competition from retailers with greater financial resources, stagnant economic conditions, price pressure, commodity and fuel-cost volatility, utility costs, labor and health-care costs, regulatory changes including the Affordable Care Act, interest-rate exposure on investments, and the ability to recover higher costs through retail pricing. Management expected diesel fuel prices to decline marginally through year-end.
The company reported no material subsequent events, no material changes in market risk and effective disclosure controls as of September 27, 2014. It corrected immaterial prior-period presentation errors involving the SERP investment and cash-flow classifications. The company also stated that it was evaluating newly issued revenue-recognition and discontinued-operations standards and did not expect the revenue-recognition adoption to have a material impact.
Important facts for investors to verify
- Whether sales growth and comparable-store momentum continued after the third quarter while pricing programs continued to pressure gross margin.
- Progress and final spending under the revised approximately $77 million 2014 capital plan, including projects deferred to 2015.
- Whether operating-expense growth, depreciation and labor or health-care costs continue to outpace sales growth.
- The liquidity impact of the $18 million of letters of credit and the company’s reliance on internally generated cash rather than debt financing.
- Future investment income, marketable-security valuations and exposure to interest-rate or equity-market changes.
- Potential effects of competition, fuel and commodity prices, minimum-wage or health-care regulations, and other risks identified in the filing.