Business Context and Reporting Period
Weis Markets, Inc. filed this unaudited Form 10-Q for the 13 and 39 weeks ended September 26, 2020, compared with September 28, 2019. The company operated 195 supermarkets in Pennsylvania and six surrounding states, with more than 24,000 associates, and reported as one operating segment.
The business was deemed essential during the COVID-19 pandemic. Management attributed stronger sales and profitability partly to pandemic-related demand, government stimulus payments, closures of other food sources, and increased market share. Ecommerce sales increased 147% year to date; curbside pickup was available at 182 stores and Shipt home delivery at 175 stores during the third quarter.
Financial Performance and Position
| Metric | 13 Weeks Ended September 26, 2020 | 13 Weeks Ended September 28, 2019 | 39 Weeks Ended September 26, 2020 | 39 Weeks Ended September 28, 2019 |
|---|---|---|---|---|
| Net sales | $1,002.4 million | $876.2 million | $3,086.9 million | $2,640.9 million |
| Gross profit | $274.3 million | $232.8 million | $831.4 million | $699.0 million |
| Gross margin | 27.4% | 26.6% | 26.9% | 26.5% |
| Income from operations | $42.8 million | $17.5 million | $136.2 million | $61.7 million |
| Operating margin | 4.3% | 2.0% | 4.4% | 2.3% |
| Net income | $31.3 million | $14.3 million | $99.5 million | $49.1 million |
| Diluted EPS | $1.16 | $0.53 | $3.70 | $1.83 |
- Third-quarter sales increased 14.4%; year-to-date sales increased 16.9%. Comparable-store sales increased 14.8% in the quarter and 17.3% year to date, or 15.7% and 18.4%, respectively, excluding fuel.
- Third-quarter net income increased 118.8%; year-to-date net income increased 102.6%. Operating income increased 144.0% in the quarter and 120.9% year to date.
- Operating, general and administrative expenses increased 7.5% in the quarter and 9.1% year to date, slower than sales growth. The ratio of these expenses to sales improved to 23.1% from 24.6% in the quarter and to 22.5% from 24.1% year to date.
- The effective tax rate increased to 27.9% from 24.5% in the quarter and to 26.8% from 24.2% year to date.
- Grocery represented 87.7% of quarterly sales and 88.4% of year-to-date sales. Pharmacy sales increased year to date, while fuel sales declined, partly reflecting lower gasoline prices.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Cash provided by operating activities was $194.2 million year to date, up from $138.7 million in the prior-year period.
- Investing cash outflows were $118.6 million, including $83.6 million of property and equipment purchases and $38.3 million of marketable-securities purchases.
- Cash dividends paid were $25.0 million, unchanged from the prior-year period. The board approved another $0.31-per-share quarterly dividend payable November 23, 2020.
- Cash and cash equivalents increased to $117.4 million at September 26, 2020, from $66.9 million at December 28, 2019. Marketable securities totaled $102.4 million.
- The company had no obligation outstanding under its revolving credit agreement since the second quarter of 2018. The unsecured facility matures September 1, 2022, provides for $30.0 million of committed capacity plus an additional discretionary $70.0 million, and had $24.1 million of availability after $5.9 million of letters of credit.
- Total assets were $1.76 billion and shareholders’ equity was $1.13 billion at September 26, 2020. Operating lease liabilities totaled $210.4 million on a current and noncurrent basis.
Material Changes Versus the Prior Comparable Period
- Sales growth and operating leverage materially improved profitability, with year-to-date operating margin rising 2.1 percentage points and net margin rising to 3.2% from 1.9%.
- Gross margin improved 0.8 percentage point in the quarter and 0.4 percentage point year to date, primarily due to sales mix and improved fresh-department sell-through that reduced product loss.
- Year-to-date investment income and interest expense declined to $0.9 million from $5.4 million, reflecting a $1.9 million unrealized loss in equity securities in 2020 versus a $1.6 million unrealized gain in 2019.
- Year-to-date noncash LIFO inventory valuation expense was $2.2 million, compared with $1.2 million of income in the prior-year period. Management expected higher annual LIFO expense because of anticipated product-cost inflation.
- Property and equipment purchases increased to $83.6 million from $70.1 million, while capital expenditures remained 2.7% of sales in both periods.
Guidance, Outlook, Commentary, and Risks
- Management planned approximately $90 million of capital investment for 2020, subject to governmental restrictions and pandemic-related shutdown mandates.
- Management expected cash from operations and available credit capacity to fund working capital, capital expenditures, acquisitions, debt requirements, and dividends. The company expected to continue regular quarterly dividends, subject to board approval and financial conditions.
- Management observed similar sales and profit trends extending into the beginning of the next quarter but stated that the longer-term impact of the pandemic and related expenses could not be determined.
- Principal risks include employee illness or quarantine, distribution-center or vendor interruptions, litigation, changing regulations, shifts in customer purchasing behavior, cybersecurity threats, competitive price pressure, economic conditions, and uncertainty regarding future inflation, deflation, and product mix.
- The filing states that interim results may not be indicative of full-year results. No material subsequent events requiring disclosure were identified through issuance of the financial statements.
- Management concluded that disclosure controls were effective as of September 26, 2020, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether pandemic-driven sales, stimulus effects, and increased market share persist after government restrictions and temporary changes in consumer behavior subside.
- The effect of COVID-19 on labor availability, supply-chain continuity, operating costs, litigation exposure, regulation, and cybersecurity.
- Progress and final spending under the approximately $90 million 2020 capital program, including any pandemic-related delays.
- Future gross-margin performance, LIFO valuation expense, commodity costs, and the sustainability of operating leverage.
- The composition and valuation volatility of the $102.4 million marketable-securities portfolio, including equity-security unrealized gains and losses.
- Availability under the revolving credit facility, outstanding letters of credit, lease obligations, and the board’s continued authorization of quarterly dividends and potential share repurchases.