Ingles Markets, Inc. — Fiscal 2016 First-Quarter 10-Q
Reporting period: Three months ended December 26, 2015; comparable period ended December 27, 2014. The unaudited quarter included 13 weeks. Ingles operated 201 supermarkets across six Southeastern states and also operated a fluid dairy business and shopping-center properties.
Financial results and key metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $951.1 million | $964.5 million | Down 1.4% |
| Gross profit | $225.6 million | $224.4 million | Up 0.6% |
| Gross margin | 23.7% | 23.3% | Up 0.4 percentage points |
| Operating income | $31.6 million | $37.5 million | Down 15.7% |
| Operating margin | 3.3% | 3.9% | Down 0.6 percentage points |
| Net income | $13.0 million | $15.0 million | Down 13.7% |
| Net margin | 1.4% | 1.6% | Down 0.2 percentage points |
| Class A basic/diluted EPS | $0.66 / $0.64 | $0.77 / $0.74 | Both lower |
| Class B basic/diluted EPS | $0.60 / $0.60 | $0.70 / $0.70 | Both lower |
| Operating cash flow | $6.5 million | $(4.8) million | Improved |
| Capital expenditures | $40.6 million | $27.6 million | Higher |
Interest expense was $12.0 million, broadly unchanged year over year. Income tax expense was $7.3 million, with a stated effective tax rate of 35.9%, compared with $11.0 million and 42.3% in the prior-year quarter. Cash and cash equivalents were $8.5 million at quarter-end, versus $7.5 million at September 26, 2015. Current assets were $441.6 million and current liabilities were $231.9 million at quarter-end.
Total debt was approximately $924.8 million at December 26, 2015, compared with $960.1 million at December 2014. Long-term debt on the balance sheet was $913.5 million, plus $11.2 million current portion. The company had $40.9 million outstanding under its $175 million line of credit. It reported compliance with debt covenants and approximately $340 million of additional borrowing capacity under the most restrictive covenant.
Material changes and management commentary
- Sales fell primarily because lower retail gasoline prices reduced gasoline sales dollars by 21.4%; average price per gallon declined 29.0%, while gallons sold rose 10.7%. Excluding gasoline, comparable grocery sales increased 2.3%; customer transactions rose 0.8% and average transaction size rose 1.7%.
- Gasoline revenue was $108.5 million versus $137.9 million. Non-gasoline categories increased, including non-foods and perishables. Retail grocery sales overall declined to $916.7 million from $926.0 million.
- Gross profit dollars and margin improved, reflecting stronger non-gasoline sales and margins. However, management said gasoline gross profit dollars fell markedly.
- Operating and administrative expenses increased 3.8% to $194.1 million, with expenses rising to 20.4% of sales from 19.4%. Management cited higher wages, repairs and maintenance, advertising, and insurance. Employee insurance expense was $9.2 million versus $7.8 million.
- Operating cash flow improved from a use of cash to a source of cash, although receivables rose $14.3 million during the quarter and accounts payable and accrued expenses declined $19.9 million. Cash used in investing was $40.6 million; financing provided $35.1 million, primarily reflecting seasonal short-term borrowings.
Outlook, risks, and unusual items
- Fiscal 2016 capital spending was expected to be approximately $100–$140 million; management cited an ongoing annual range of approximately $100–$160 million to maintain and modernize stores. Quarter-end construction commitments were $24.5 million.
- Management said available resources, including operating cash flow and financing, were expected to cover planned capital expenditures, working capital, and debt service for the foreseeable future, but financing availability and terms are not assured.
- Risks identified include competition and pricing pressure, lower gasoline prices, labor and utility cost increases, economic and weather conditions, financing availability, execution of store expansion and modernization, and real-estate development outcomes.
- Self-insurance reserves totaled $36.0 million, including $14.4 million current and $21.6 million long-term; the reported long-term amount included $5.2 million of expected recoveries. The company is self-insured for specified risks, subject to excess coverage limits.
- The company paid quarterly dividends of $0.165 per Class A share and $0.150 per Class B share and expected to continue regular quarterly dividends, subject to board discretion, financial results, and debt restrictions.
- Management attributed the stated 35.9% current-quarter effective tax rate to discrete items not expected to recur. The MD&A also calls this rate “higher” than the prior period’s 42.3%, which conflicts with the reported figures.
- No asset impairments were recorded in the quarter. The filing reports no material change in contractual obligations or market-risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the MD&A’s description of the 35.9% tax rate as “higher” with the reported 42.3% prior-year rate, and assess the impact of the nonrecurring tax items.
- Track gasoline prices, fuel margins, and non-gasoline comparable sales to understand revenue and gross-profit trends.
- Assess whether rising labor, insurance, maintenance, and advertising costs can be controlled as store investment continues.
- Review planned capital spending, construction commitments, line-of-credit usage, debt maturities, and covenant headroom.
- Monitor self-insurance claims and reserve estimates, and confirm the timing and realization of expected recoveries.
- Consider seasonality: management says the first fiscal quarter typically benefits from Thanksgiving and Christmas sales and the second quarter typically has the lowest sales.