Village Super Market, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended July 25, 2020 (52 weeks). The filing also reports fourth-quarter results. Dollar amounts below are in millions unless otherwise noted.
Business context and reporting period
Village operated 30 ShopRite supermarkets, five Fairway Markets and three Gourmet Garage specialty markets across New Jersey, New York, Pennsylvania and Maryland. On May 14, 2020, it acquired five Fairway supermarkets, a production distribution center and related intellectual property for $73.6 million, net of cash acquired. The acquisition expanded the company’s New York City presence and increased its store count to 38.
Key financial results
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Sales | $1,804.6 | $1,643.5 | Up 9.8%; same-store sales increased 5.3%. |
| Gross profit / margin | $506.5 / 28.07% | $456.7 / 27.79% | Margin up 0.28 percentage points, helped by acquired businesses. |
| Operating income / margin | $30.3 / 1.68% | $34.7 / 2.11% | Lower despite sales growth. |
| Net income / margin | $24.9 / 1.38% | $25.5 / 1.55% | Down 2.4% in reported dollars. |
| Class A diluted EPS | $1.72 | $1.77 | Down from prior year. |
| Operating cash flow | $83.9 | $55.8 | Increase primarily reflected working-capital changes and noncash adjustments. |
| Capital expenditures | $54.5 | $28.0 | Included store, fulfillment and acquisition-integration projects. |
| Cash and cash equivalents | $111.7 | $101.1 | Year-end balance. |
| Working capital | $34.5 | $56.3 | Current ratio was 1.21 versus 1.50. |
Reported operating expenses included substantial COVID-response costs, acquisition and store-opening items, and unusual gains. Excluding specified items in both years, management said net income decreased 8% in FY2020. Fiscal 2020 included more than $13.5 million of incremental operating expenses in the second half for associate support, safety and sanitation measures.
Debt, liquidity and capital allocation
At July 25, 2020, borrowings under the credit facility totaled $74.7 million: $50.0 million drawn on the revolving line and $24.7 million remaining on the term loan. Total debt excluding lease obligations was $80.6 million, including $5.9 million of New Markets Tax Credit financing. The balance sheet also included $317.1 million of operating lease obligations and $23.5 million of finance lease obligations. The company reported $67.7 million available under the revolver at year-end and compliance with its credit covenants.
The May 2020 facility provides a $125 million revolving line and a $25.5 million term loan. Subsequent to year-end, on September 1, 2020, Village converted $50 million of revolving borrowings into a secured term loan, reducing revolving capacity to $75 million. The filing reports $12.965 million of dividends paid and $4.389 million of treasury-stock purchases during FY2020. Cash used for the Fairway acquisition was funded with credit-facility borrowings.
Material changes and management commentary
- COVID-19 drove exceptional customer demand and contributed to 5.3% same-store sales growth. Average basket sizes increased while transaction counts declined; digital sales grew 83% year over year.
- Fairway and Gourmet Garage sales declined significantly from historical levels, which management attributed primarily to population migration out of Manhattan during the pandemic. Fairway’s fourth-quarter sales and operating profits were below projections.
- Excluding acquired stores, gross margins declined as price investments, lower pharmacy reimbursement rates, weaker Wakefern patronage dividends and product mix effects offset lower promotional spending and other benefits.
- Operating and administrative expense as a share of sales rose 0.63 percentage points. Excluding specified items from both periods, management attributed a 0.47-point increase primarily to COVID-related costs and higher occupancy costs, partly offset by lower workers’ compensation expense and sales leverage.
- FY2020 included a $2.733 million Superstorm Sandy insurance recovery and a $2.035 million credit related to the breakup of Village’s initial Fairway stalking-horse bid. Other reported items included a pharmacy prescription-list sale gain, a tax benefit from a federal NOL carryback, Fairway transaction costs, pension settlement charges and Stroudsburg replacement-store costs.
Outlook, risks and contingencies
- Management expected FY2021 same-store sales to be flat to slightly down, with positive first-half trends offset by weaker comparisons in the second half as pandemic-related demand normalized.
- Management expected gross-margin pressure from continued Right Price Promise pricing investments, excluding acquired stores; budgeted $35 million for FY2021 capital expenditures; and forecast an effective tax rate of 30.5%–31.5%.
- The Board’s stated intention was to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management believed cash, operating cash flow and the credit facility would cover foreseeable needs.
- Key uncertainties include the duration and economic effects of COVID-19, Fairway integration and performance, intense low-margin competition, reliance on Wakefern for merchandise and services, labor negotiations and pension costs, and potential food-safety, cyber-security and asset-impairment exposures.
- Approximately 90% of employees were covered by collective bargaining agreements; contracts for about 31% of associates had expired or were due to expire within one year. Certain multi-employer pension plans were underfunded, and withdrawal could trigger liability.
- Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity. The Sandy insurance litigation had concluded and the company reported total related recoveries of $6.730 million.
Important facts for investors to verify
- Whether Fairway’s sales and profitability recover from pandemic-related Manhattan population shifts, and whether integration delivers anticipated benefits.
- How much of FY2020 earnings and cash flow reflected temporary pandemic demand, tax benefits, insurance recoveries and other unusual items.
- Post-year-end debt balances, the effect of the $50 million conversion on borrowing availability, and ongoing compliance with credit covenants.
- Whether the projected FY2021 sales, margin, capital-spending and dividend assumptions are met.
- Potential exposure from labor-contract renewals, underfunded multi-employer plans and pension-plan settlements.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Fairway’s controls were excluded from the company’s FY2020 internal-control assessment while integration was in progress.