AMCON Distributing Company — Q2 FY2017 Form 10-Q
Business context and period: Fiscal second quarter ended March 31, 2017; comparisons are with the three and six months ended March 31, 2016. AMCON distributes consumer products to approximately 4,000 retail outlets and operates 16 natural-food stores. The financial statements are unaudited.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Sales | $294.0m | $296.4m | $604.2m | $618.5m |
| Gross profit | $17.5m | $17.5m | $35.8m | $36.5m |
| Gross margin | 5.9% | 5.9% | 5.9% | 5.9% |
| Operating income | $1.1m | $2.2m | $3.2m | $4.7m |
| Net income | $0.5m | $1.1m | $1.5m | $2.5m |
| Diluted EPS | $0.71 | $1.61 | $2.22 | $3.46 |
- Q2 sales declined 0.8%; net income fell 57.4%. For the six-month period, sales decreased 2.3% and net income declined 38.7%.
- Q2 operating expenses rose $1.0m, including a $0.6m increase in health insurance costs. Six-month operating expenses increased $0.8m.
- Wholesale Q2 sales decreased 0.5%, while gross profit increased 2.6% and gross margin rose to 5.1%. Retail Q2 sales fell 10.9%, and gross profit fell 13.1%; the retail segment reported a $0.2m operating loss.
- Wholesale six-month sales decreased 2.1%, with gross profit roughly flat. Retail sales fell 12.5% and gross profit fell 11.5%; retail reported a $0.5m operating loss.
- Operating cash flow was $7.7m for the six months, compared with $7.4m a year earlier. Capital expenditures were $0.8m; net cash used in financing was $7.2m. Cash declined from $0.6m at September 30, 2016 to $0.2m.
- At March 31, current assets were $83.0m and current liabilities $26.6m. Credit-facility borrowings were $5.1m; long-term debt including current maturities totaled approximately $3.2m. Facility availability was reported as $63.8m.
Changes, outlook, and risks
- Management attributed wholesale sales weakness primarily to lower cigarette carton volume and mix, partly offset by manufacturer price increases. Cigarette volume and mix reduced six-month sales by $24.9m; price increases added $12.7m.
- Retail sales were affected by a prior-year flagship Florida store closure and ongoing competition. The company described plans to reposition retail through new-store design, selected remodels, merchandising changes, and branding; three stores were undergoing remodel or enhancement and another new store was under development.
- Management stated it expected liquidity to be adequate to sustain operations, but warned that a sharp change in operating conditions could affect revenue, receivables collection, or access to bank credit. No numerical earnings or revenue guidance was provided.
- The revolving facility had a $70m stated limit, July 2018 maturity, and interest rates based on prime or LIBOR. Availability had not fallen below the level that triggers the fixed-charge coverage covenant; management said the ratio was above 1.0. The facility restricts common dividends above $1.00 per share annually unless specified conditions are met.
- Risks include declining cigarette demand, excise taxes and tobacco regulation, competition in wholesale and natural-food retail, fuel and commodity costs, customer credit risk, and access to capital. The company does not hedge interest-rate or fuel-cost exposure.
- No legal proceedings, material changes to previously disclosed risk factors, or off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether cigarette volume declines and retail competition continue, and how they affect sales, margins, and earnings.
- Whether planned retail remodels, new-store development, and repositioning improve store performance and cash returns.
- Facility availability, borrowing-base limits, covenant headroom, and the July 2018 maturity and renewal terms.
- Drivers of the sharp year-over-year decline in operating income and net income, including health-insurance costs and other expenses.
- Cash conversion and working-capital seasonality, alongside dividends and share repurchases; the company repurchased 11,104 shares for about $1.0m during the six months.