AMCON Distributing Company — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2017; fiscal year ends September 30. The filing is unaudited. AMCON operates a wholesale consumer-products distribution business and 15 natural/health-food stores.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Sales, including excise taxes | $332.8 million | $333.4 million | $937.0 million | $951.9 million |
| Gross profit | $18.0 million | $19.2 million | $53.8 million | $55.7 million |
| Gross margin | 5.4% | 5.7% | 5.7% | 5.8% |
| Operating income | $1.0 million | $3.3 million | $4.2 million | $8.1 million |
| Net income | $0.4 million | $1.9 million | $1.9 million | $4.4 million |
| Basic / diluted EPS | $0.57 / $0.56 | $3.03 / $2.62 | $2.82 / $2.78 | $6.91 / $6.07 |
Q3 operating expenses rose 7.7% to $17.1 million, while operating income fell 71% and net income fell 79%. For nine months, operating expenses increased 4.3% to $49.6 million; operating income declined 48% and net income declined 56%.
Cash flow and liquidity: Operating cash flow was $3.4 million for the nine months, versus $13.4 million a year earlier. Capital expenditures were $1.8 million, and cash ended at $0.12 million. At June 30, current assets were $89.6 million and current liabilities $28.2 million. The credit facility had $10.3 million outstanding and $59.3 million available; reported average borrowings were $16.9 million and peak borrowings $41.1 million during the period.
Debt: The revolving facility balance was $10.3 million; long-term debt, including current maturities, totaled approximately $3.1 million. The facility matures in July 2018, is secured by company assets, and had a 3.18% average interest rate at quarter-end. Management stated availability had not fallen below the 10% covenant trigger and the fixed-charge ratio was above 1.0. Common dividends paid were $0.6 million year to date; the company also repurchased 11,104 shares for approximately $1.0 million, with no repurchases in Q3.
Changes and operating drivers
- Wholesale sales declined 0.1% in Q3 and 1.4% year to date. Cigarette carton volume and mix reduced sales by $10.9 million in Q3 and $35.8 million year to date; manufacturer price increases partly offset the declines.
- Wholesale Q3 gross profit decreased $1.0 million, reflecting cigarette price-increase timing and volume/mix. The timing benefit occurred in Q2 this year, compared with Q3 last year. Wholesale gross margin was 4.7% in Q3 versus 5.0% a year earlier; year-to-date margin was 5.0% in both periods.
- Retail sales declined 2.5% in Q3 and 9.5% year to date. Existing stores faced increased competition; the year-to-date comparison also reflected the prior-year closure of a Florida flagship store. Retail generated an operating loss of $0.6 million in Q3 and $1.1 million year to date, compared with operating income of $0.1 million and $0.4 million, respectively, in the prior periods.
- Management attributed higher operating costs to health insurance claims, wholesale fuel and other costs, and retail marketing and employee costs. Q3 and year-to-date health insurance costs were higher by $0.4 million and $0.8 million, respectively.
Outlook, risks, and other matters
No specific financial guidance was provided. Management said it remains optimistic about convenience-store distribution and is focused on customer services, technology, non-tobacco sales, and disciplined expansion. For retail, it described a repositioning effort centered on remodeling, smaller-format store designs, fresh and prepared offerings, and customer engagement. During Q3, three existing stores were remodeled or enhanced, one underperforming Midwest store was closed, and a new Florida store was under construction.
Key disclosed risks include declining cigarette demand, excise taxes and tobacco regulation, competition across wholesale and natural-food retail, fuel and commodity costs, customer credit and inventory risk, and access to bank credit. The company does not hedge interest-rate or fuel-cost exposure. Management believed liquidity was adequate but warned that a sharp deterioration in operating conditions could affect revenue, collections, or credit access. A $0.4 million workers’ compensation letter of credit was outstanding. No off-balance-sheet arrangements or legal proceedings were reported; no material changes to previously disclosed risk factors were identified. Disclosure controls were deemed effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether cigarette volume declines and price-increase timing continue to pressure wholesale sales and gross profit.
- Whether retail store changes improve comparable sales and profitability amid intensified competition.
- How working-capital seasonality affects cash flow, and whether the stated credit availability remains accessible as the July 2018 facility maturity approaches.
- How management’s remodeling, new-store, and customer-engagement plans affect costs and returns; the filing provides no quantified outlook.