Village Super Market, Inc. — FY2018 Form 10-K
Business context and reporting period. Village operates ShopRite supermarkets and is a major member of Wakefern, its principal supplier and the owner of the ShopRite name. The fiscal year ended July 28, 2018, comprised 52 weeks. The filing is an annual report; fiscal Q4 results are also presented. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Sales | $1,612.0 | $1,604.6 |
| Gross profit / margin | $439.0 / 27.23% | $436.7 / 27.22% |
| Operating income / margin | $33.5 / 2.07% | $40.7 / 2.54% |
| Net income / net margin | $25.1 / 1.55% | $22.9 / 1.43% |
| Operating cash flow | $58.9 | $46.2 |
| Capital expenditures | $35.5 | $27.7 |
| Cash and cash equivalents at year-end | $96.1 | $87.4 |
| Long-term debt | $48.2 | $42.6 |
| Working capital | $89.2 | $85.3 |
Sales increased 0.5%; same-store sales rose 0.2%. The Bronx store opened June 28, 2018. Cash flow from operations increased, while cash used in investing activities was $42.6 million and cash used in financing was $7.7 million. The company paid $12.9 million in dividends. It had no borrowings under its $25 million revolving credit line at year-end. Lease obligations and rent commitments are significant; the balance sheet includes $41.8 million of long-term capital and financing lease obligations.
For fiscal Q4, sales were $413.6 million versus $410.7 million a year earlier; net income was $6.0 million versus $6.8 million.
Material changes and unusual items
- Operating income fell about 18% despite slightly higher gross margin. Operating and administrative expense rose to 23.61% of sales from 23.15%, reflecting service and training payroll, consulting fees, Bronx pre-opening costs, Wakefern assessments and occupancy costs, partly offset by a multi-employer pension credit.
- Net income rose to $25.1 million, but FY2018 included a $3.3 million tax benefit from remeasurement of deferred taxes following the Tax Cuts and Jobs Act, an $822,000 after-tax pension-related credit, $877,000 after-tax Wakefern assessments and $695,000 after-tax Bronx pre-opening costs. Excluding these items, management said net income decreased 2%.
- The effective tax rate was 23.6%, versus 41.4% in FY2017; excluding the tax-law remeasurement benefit, FY2018’s rate was 33.7%.
- Village entered a New Markets Tax Credit financing arrangement for the Bronx store. The arrangement includes a seven-year recapture period and potential indemnification exposure if requirements are not met; management did not expect recapture.
Outlook, risks and contingencies
- Management expects FY2019 same-store sales growth of 0.5%–2.5%, capital expenditures of $40 million, and an effective tax rate of 30%–31%. Planned spending includes a replacement store in Stroudsburg, three minor remodels, self-checkout expansion and other upgrades.
- The Board intended to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management expected operating cash flow and other liquidity sources to cover anticipated needs and forecast a $3 million FY2019 pension contribution.
- Competition and narrow grocery margins, competitor openings, regional concentration, and dependence on Wakefern for merchandise, services and patronage dividends are significant business risks. Approximately 89% of employees are union-represented; about 19% are covered by contracts expired or expiring within one year. Certain multi-employer pension plans are underfunded.
- Other identified exposures include food safety, cyber and information-system interruptions, self-insured claims, impairment of store assets, tax examinations and potential changes in tax law. Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity.
- Wakefern-related balances are substantial: $63.4 million of demand deposits and $47.1 million of notes receivable at year-end. The company also purchases substantially all merchandise from Wakefern, creating counterparty and concentration exposure.
Key facts for investors to verify
- Whether same-store sales improve within management’s FY2019 range and whether the Bronx store contributes profitably after its opening costs.
- Whether expense growth, competitive pricing and promotional spending continue to pressure operating margins.
- The quality and sustainability of earnings excluding the $3.3 million tax benefit and other nonrecurring FY2018 items.
- Wakefern’s financial condition, patronage dividend levels, and the credit and liquidity implications of Village’s large Wakefern deposits and receivables.
- Progress on the $40 million capital program, lease commitments, pension funding and labor negotiations, including multi-employer plan exposure.
- Compliance with New Markets Tax Credit requirements and the outcome of ongoing tax audits and other contingencies.