Business Context and Reporting Period
Company: Village Super Market, Inc. (VLGEA)
Filing Type: Form 10-K (Annual Report)
Fiscal Year End: July 28, 2012
Business Overview: Village operates 29 ShopRite supermarkets, primarily in New Jersey (18 stores), with additional locations in Maryland (2) and Pennsylvania (1). The Company is the second-largest member of Wakefern Food Corporation, a retailer-owned cooperative that provides purchasing, distribution, and marketing economies of scale. Village focuses on high-volume sales through low pricing and expanded superstore formats featuring specialty departments.
Key Financial Metrics
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Sales | $1,422,243 | $1,298,928 |
| Gross Profit | $388,827 | $350,159 |
| Gross Margin % | 27.34% | 26.96% |
| Net Income | $31,445 | $20,982 |
| Net Income Margin % | 2.21% | 1.62% |
| Net Income Per Share (Class A - Diluted) | $2.28 | $1.54 |
| Operating Cash Flow | $43,432 | $64,144 |
| Capital Expenditures | $16,729 | $13,346 |
| Total Assets | $409,538 | $386,190 |
| Long-Term Debt | $43,149 | $43,147 |
| Working Capital | $71,672 | $44,448 |
| Shareholders' Equity | $230,311 | $208,157 |
Note: All dollar amounts in thousands, except per share data.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 9.5% to $1.42 billion, driven by a 4.9% same-store sales increase, the acquisition of a store in Old Bridge, NJ, and the inclusion of two new Maryland stores opened in July 2011.
- Profitability: Net income rose 50% to $31.4 million. This improvement was significantly aided by the absence of a $7.0 million pre-tax pension withdrawal liability charge recorded in fiscal 2011. Excluding this one-time charge, net income increased approximately 25% year-over-year.
- Margins: Gross profit margin improved by 0.38 percentage points due to higher departmental margins, reduced warehouse assessment charges from Wakefern, and increased patronage dividends. Operating expenses as a percentage of sales decreased by 0.53%, largely due to the prior year's pension charge.
- Cash Flow: Operating cash flow decreased to $43.4 million from $64.1 million, primarily due to the settlement of the $7.0 million pension liability in the current year and changes in working capital payables.
- Acquisitions: Acquired the Old Bridge, NJ store for $3.25 million (fixtures/lease) plus $1.1 million inventory in January 2012.
Guidance, Outlook, and Risks
Management Outlook
- Same-Store Sales: Expected to increase between 2.0% and 4.0% in fiscal 2013, including the positive impact of the Maryland stores entering the same-store sales calculation.
- Capital Expenditures: Budgeted at $20 million for fiscal 2013, covering the start of construction on two replacement stores and three major remodels.
- Dividends: Currently paying dividends at an annualized rate of $1.00 per Class A share and $0.65 per Class B share. The Board will reconsider policy based on tax rates and other factors.
- Tax Rate: Effective income tax rate expected to be between 41.5% and 42.5% in fiscal 2013.
Risks and Contingencies
- Wakefern Dependency: Village purchases substantially all merchandise from Wakefern. Any material change in this relationship or Wakefern's operations could adversely impact the business.
- Geographic Concentration: Most stores are in New Jersey, making the company vulnerable to local economic downturns.
- Labor Relations: Approximately 93% of employees are unionized. Rising healthcare and pension costs are key negotiation topics, and work stoppages could disrupt operations.
- Pension Liabilities: The Company remains liable for potential additional withdrawal liabilities from the United Food and Commercial Workers Local 152 Retail Meat Pension Fund if a mass withdrawal occurs within two years. Certain multi-employer plans are underfunded, potentially leading to increased contributions.
- Legal/Tax: Ongoing disputes with the State of New Jersey regarding tax deficiencies for fiscal years 2002-2009 could significantly impact unrecognized tax benefits.
Investor Verification Checklist
- Pension Withdrawal Liability: Verify the status of the $7.0 million pension withdrawal liability settled in 2012 and assess the risk of additional liabilities from the "mass withdrawal" clause.
- New Market Performance: Monitor the sales performance and profitability of the two Maryland stores, which are currently underperforming relative to the company average.
- Wakefern Relationship: Review the terms of the Wakefern Stockholder Agreement, specifically the 85% purchase obligation and capital contribution requirements.
- Tax Disputes: Track the resolution of the New Jersey tax audits regarding nexus and inter-subsidiary payments, which could impact future tax provisions.
- Lease Expirations: Review the schedule for the two planned replacement stores to ensure they open before existing lease expirations to avoid revenue gaps or unfavorable renewal terms.