Ingles Markets, Inc. — Form 10-Q Summary
Business context and period: The unaudited report covers the 13 weeks ended December 29, 2012, the first quarter of fiscal 2013, compared with the 13 weeks ended December 24, 2011. Ingles operated 203 supermarkets in six southeastern states, along with a fluid dairy business and shopping-center rentals.
Financial performance
| Metric | Quarter ended Dec. 29, 2012 | Prior comparable quarter |
|---|---|---|
| Net sales | $932.8 million | $918.2 million |
| Gross profit / margin | $207.9 million / 22.3% | $201.7 million / 22.0% |
| Operating income / margin | $33.5 million / 3.6% | $30.4 million / 3.3% |
| Income before taxes | $18.5 million | $16.4 million |
| Net income / net margin | $11.6 million / 1.2% | $10.6 million / 1.2% |
| Class A basic / diluted EPS | $0.50 / $0.48 | $0.45 / $0.43 |
| Operating cash flow | $(5.3) million | $7.4 million |
| Capital expenditures | $28.1 million | $63.7 million |
- Comparable grocery-store sales increased 1.7% including gasoline and 1.5% excluding gasoline. Excluding gasoline, net sales rose 1.4%. Customer transactions excluding gasoline rose 1.4%, while average transaction size was essentially unchanged.
- Gross margin improved, including grocery gross margin excluding gasoline of 26.0% versus 25.5%. Dairy segment gross profit fell 9.1% to $5.0 million, with higher milk costs and competitive pressure weighing on margins.
- Operating and administrative expenses increased 1.8% to $174.8 million but remained 18.7% of sales. Higher wages and insurance costs were partly offset by lower depreciation and repair costs.
- Interest expense rose to $15.6 million from $15.0 million, partly because interest on the distribution-center bonds was no longer capitalized after the facility opened. The effective tax rate rose to 37.4% from 35.2% as temporary tax incentives expired.
- Operating cash use reflected working-capital movements, including increased inventory and lower accounts payable and accrued expenses. Financing activities provided $38.0 million, including net short-term borrowing; cash ended the quarter at $9.4 million.
Financial position, debt and liquidity
- At December 29, 2012, total assets were $1.66 billion, total liabilities $1.22 billion, and stockholders’ equity $446.0 million. Current assets were $445.5 million and current liabilities $296.4 million.
- Total debt was approximately $877.0 million, including $564.2 million of senior notes, $99.7 million of Recovery Zone Facility Bonds, $128.3 million of real estate and equipment notes, and $84.8 million drawn on the $175 million credit line. Cash was $9.4 million.
- The 8.875% senior notes are due in 2017 and became callable beginning May 15, 2013 at 104.438% of principal. The company said it was monitoring market conditions. The bonds have a final maturity in 2036; annual mandatory redemptions of $4.53 million begin in January 2014.
- The company reported compliance with debt covenants, with significant headroom, and stated that available resources were expected to cover planned capital spending, working capital, and debt service for the foreseeable future. Debt agreements contain cross-default provisions and restrictions on additional dividends.
Outlook, commentary and risks
- Fiscal 2013 capital expenditures were expected to be approximately $100–$130 million; the company expected net annual capital expenditures of approximately $110–$180 million going forward to maintain and modernize its stores. Construction commitments at quarter-end were $9.3 million.
- Management expected to continue regular quarterly dividends, subject to board discretion and debt restrictions. A special dividend of $0.66 per Class A share and $0.60 per Class B share, plus the regular quarterly dividend normally payable in January, was paid in December 2012 in connection with tax-rate changes.
- Key disclosed risks include competition and pricing pressure, economic conditions, gasoline availability and prices, food safety, labor and utility costs, financing availability and terms, self-insurance claims, and the performance of new or remodeled stores. Management reported no asset impairments in the quarter and no material change in contractual obligations other than as disclosed.
- The company stated that quarterly results are seasonal and are not necessarily indicative of full-year results. Management reported disclosure controls and procedures were effective as of December 29, 2012.
Important facts for investors to verify
- Whether the modest sales and margin gains persist, particularly given gasoline-price effects and pressure on dairy margins.
- How the company manages the May 2013 call date on its senior notes and its overall debt and interest burden.
- Whether operating cash flow recovers after the quarter’s working-capital outflow while planned capital expenditures proceed.
- The sustainability and financing of the unusually large December dividends, and the board’s future dividend decisions.
- Changes in self-insurance claims, food and labor costs, competition, and store investment returns.