Village Super Market, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2014, ended January 25, 2014. Dollar amounts are in thousands except per-share data. Village operated 29 ShopRite supermarkets in New Jersey, Maryland, and northeastern Pennsylvania.
Financial performance
| Metric | 13 weeks ended Jan. 25, 2014 | 13 weeks ended Jan. 26, 2013 | 26 weeks ended Jan. 25, 2014 | 26 weeks ended Jan. 26, 2013 |
|---|---|---|---|---|
| Sales | $392,241 | $382,175 | $749,287 | $740,326 |
| Gross profit | $105,358 | $102,920 | $199,064 | $198,558 |
| Operating income | $5,857 | $14,447 | $12,106 | $24,920 |
| Net income (loss) | $2,818 | $9,104 | $(4,012) | $14,959 |
| Net income (loss) per Class A share, basic | $0.23 | $0.76 | $(0.32) | $1.31 |
- Second-quarter gross margin was 26.86% versus 26.93%; operating margin was 1.49% versus 3.78%; net margin was 0.72% versus 2.38%.
- Six-month gross margin was 26.57% versus 26.82%; operating margin was 1.62% versus 3.36%. The six-month net margin was negative 0.54%, versus positive 2.02%.
- Operating cash flow for the first six months was $31,088, compared with $30,756. Capital expenditures were $29,238; financing cash outflow was $6,880, including $6,164 of dividends. Cash declined $5,828 to $103,743.
- At period end, current assets were $204,838 and current liabilities $133,614; working capital was $71,224 and the current ratio was 1.5, down from 1.8 at fiscal year-end. Capital and financing lease obligations totaled $41,064, and notes payable to Wakefern totaled $2,075.
Changes and drivers
- Second-quarter sales increased 2.6%, but same-store sales were flat. Six-month sales increased 1.2%, while same-store sales declined 0.2%. The new 77,000-square-foot Hanover Township replacement store contributed to sales growth.
- Management attributed margin pressure to lower departmental margins and promotional spending, including investments in lower prices to compete with nontraditional retailers. Higher patronage dividends and improved product mix partly offset the declines.
- Operating and administrative expense rose as a share of sales by 2.16 percentage points in the quarter and 1.43 points year to date. Drivers included a $3,481 charge for remaining Morris Plains store lease obligations, higher payroll and healthcare, snow removal, legal and consulting fees, and replacement-store pre-opening costs.
- Reported second-quarter net income included a $2,012 after-tax charge for the Morris Plains closure; the comparable prior-year quarter included $840 of after-tax partnership income. Excluding these items, management said quarterly net income declined 42%.
- The six-month loss included a $10,052 income-tax charge related to prior-year tax positions following an unfavorable New Jersey Tax Court ruling, as well as the Morris Plains closure charge. Management said that, excluding specified unusual items in both periods, six-month net income declined 42%.
Liquidity, outlook, and risks
- Management budgeted approximately $45,000 in fiscal 2014 capital expenditures, including two replacement stores, and expected cash on hand and operating cash flow to meet working-capital, capital-spending, and debt-payment needs for the foreseeable future.
- Fiscal 2014 guidance included same-store sales from a 0.5% decline to a 1.0% increase; slight retail price inflation; and an effective tax rate of 46.5%–47.5%, or 41.5%–42.5% excluding interest and penalties on unrecognized tax benefits. The Board intended to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share.
- The Company was appealing the New Jersey Tax Court decision concerning tax nexus. No payment was due until the dispute is definitively resolved. Accrued interest and penalties were $14,793 at January 25, 2014; gross unrecognized tax benefits were $26,248.
- Wakefern, the Company’s principal supplier and cooperative affiliate, prepaid a $23,219 note on February 15, 2014. Village then invested $40,000 in variable-rate Wakefern notes with 3.5- and 5-year maturities, subject to Wakefern’s prepayment rights and specified investor prepayment conditions.
- Other risks include intense competition and narrow margins, cautious consumer spending and reduced SNAP benefits, reliance on Wakefern, labor and healthcare costs, underfunded multi-employer pension plans, and potential additional lease costs for another replacement-store closure. Village also said final recovery of its Superstorm Sandy insurance claim could materially affect results; Wakefern had sued the insurer on behalf of its members.
- Management reported disclosure controls were effective and no significant changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and potential cash or earnings impact of the New Jersey tax appeal and related accrued liabilities.
- Resolution and amount of any recovery from the Superstorm Sandy insurance claim.
- Execution, cost, and expected returns of the replacement-store program, including the additional anticipated lease charge.
- Whether same-store sales and margins meet management’s outlook amid competition, SNAP reductions, and cautious consumer spending.
- Terms, liquidity, and Wakefern counterparty exposure of the $40,000 variable-rate notes issued after quarter-end.