Village Super Market, Inc. — Q2 FY2019 Form 10-Q
Reporting period: 13 and 26 weeks ended January 26, 2019; comparisons are to the periods ended January 27, 2018. Financial statement amounts are in thousands of dollars, except per-share data. Village operated 30 ShopRite supermarkets and is a major member of Wakefern, its principal supplier and cooperative.
Financial results
| Metric | 13 weeks ended Jan. 26, 2019 | 13 weeks ended Jan. 27, 2018 | 26 weeks ended Jan. 26, 2019 | 26 weeks ended Jan. 27, 2018 |
|---|---|---|---|---|
| Sales | $428,128 | $418,269 | $829,678 | $805,609 |
| Gross profit | $117,736 | $113,467 | $229,848 | $218,259 |
| Operating income | $10,683 | $9,833 | $19,603 | $15,186 |
| Net income | $7,571 | $9,511 | $13,839 | $12,528 |
| Class A basic / diluted EPS | $0.59 / $0.53 | $0.74 / $0.66 | $1.08 / $0.96 | $0.97 / $0.87 |
| Class B basic / diluted EPS | $0.38 / $0.38 | $0.48 / $0.48 | $0.70 / $0.70 | $0.63 / $0.63 |
- Sales increased 2.4% for the quarter and 3.0% for the half-year. The Bronx store, opened June 2018, contributed to growth. Same-store sales declined 0.1% in the quarter and increased 0.6% for the half-year.
- Gross margin improved to 27.50% from 27.13% for the quarter, and to 27.70% from 27.09% for the half-year. Operating margin was 2.50% versus 2.35% and 2.37% versus 1.89%, respectively. Higher Wakefern patronage dividends and rebates, improved departmental margins, product mix, and lower promotional spending supported gross margin.
- Quarterly net income was below the prior year as the prior-year quarter included a $2,726 noncash tax benefit from the Tax Act. Excluding that benefit, management said quarterly net income increased 12%. Half-year net income increased 10% as reported; excluding the current-period Sandy insurance gain and prior-year tax benefit, management reported a 38% increase, citing same-store sales, margins, and tax effects.
- Effective tax rates were 30.4% for the quarter and 30.3% for the half-year, versus 0.9% and 15.0% in the comparable 2018 periods. The prior-year rates reflected the $2,726 deferred-tax remeasurement benefit. Fiscal 2019’s rate also reflects New Jersey’s temporary rate increase.
Cash flow, liquidity and financial position
- Half-year operating cash flow was $35,878, up from $28,424. Investing used $15,162, including $13,631 of capital expenditures; financing used $8,290, including $6,435 of dividends and $1,126 of long-term debt principal payments. Cash and cash equivalents increased $12,426 to $108,534.
- At January 26, 2019, current assets were $197,096 and current liabilities $102,153; working capital was $94,943, with a 1.93 current ratio. Total assets were $490,400 and shareholders’ equity $311,540.
- Long-term debt was $48,377, principally $41,304 of capital and financing lease obligations and $6,294 related to New Markets Tax Credit financing. The $25,000 unsecured revolving credit facility had no borrowings outstanding; it expires December 2020 and is subject to financial covenants.
- Village held $48,612 of variable-rate notes receivable from Wakefern and had $86,261 in demand deposits invested there. These related-party balances and interest income are material to liquidity and results. A $24,870 Wakefern note matured in February 2019; the company reinvested $24,937 of proceeds in a new note due February 2024.
Outlook, risks and unusual items
- Management expected fiscal 2019 same-store sales to range from flat to a 1.0% increase, capital expenditures of $40,000, and an effective tax rate of 30%–31%. Planned spending includes a replacement Stroudsburg store, remodels, self-checkout expansion, and technology and facility upgrades.
- 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 expected cash on hand, operating cash flow, and other liquidity sources to cover anticipated needs.
- Management expected approximately $1,300 of fiscal 2019 defined-benefit pension cost and $5,000 in pension contributions; no contributions had been made through January 26. Operating expenses may face pressure from operational initiatives, payroll, healthcare, and fringe-benefit costs.
- The quarter included $415 of additional Superstorm Sandy insurance recovery, recognized as a reduction in operating and administrative expense; total recoveries were $3,998. Management considered further proceeds uncertain. Other routine litigation was not expected to materially affect the company.
- Key risks include intense price competition and narrow grocery margins, competitor openings, dependence on Wakefern for merchandise and services, labor agreements covering approximately 89% of employees, pension costs, food safety, self-insurance claims, impairment of store assets, and information-system or cybersecurity incidents. The company reported no outstanding borrowings on its revolver and said it did not anticipate New Markets Tax Credit recapture.
- The company planned to adopt the new lease accounting standard in fiscal 2020 and expected a material increase in reported lease liabilities and right-of-use assets. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-store sales meet the flat-to-1.0% fiscal 2019 outlook, particularly given the quarter’s 0.1% decline and competitor openings.
- How much reported margin improvement depends on Wakefern patronage dividends, rebates, and favorable product mix.
- The performance and cash-flow contribution of the Bronx store and the expected cost and timing of the Stroudsburg replacement project.
- Wakefern’s financial condition and the company’s exposure through supplier dependence, demand deposits, and notes receivable.
- Actual fiscal 2019 capital expenditures, pension contributions, dividend payments, and the effect of lease-standard adoption on reported leverage.
- Whether Sandy-related insurance recoveries, tax-rate changes, or other unusual items materially affect comparisons in subsequent periods.