Weis Markets, Inc. 2019 Form 10-K Summary
Business context and reporting period
Weis Markets, Inc. is a Pennsylvania-based conventional supermarket operator founded in 1912. It operates a single reportable segment across Pennsylvania and six surrounding states, selling groceries, fresh foods, pharmacy services, fuel and general merchandise. Fiscal 2019 comprised 52 weeks ended December 28, 2019; the comparable fiscal 2018 period also comprised 52 weeks and ended December 29, 2018.
- Year-end store count was 198, comprising 116 stores in Pennsylvania and 82 stores across Delaware, Maryland, New Jersey, New York, Virginia and West Virginia. The filing also states that one store opened and two closed after year-end, resulting in 197 stores thereafter.
- The company employs approximately 23,000 associates and self-distributes approximately 66% of products.
- The Weis family controls approximately 65% of voting power.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $3,543.3 million | $3,509.3 million | +1.0% |
| Gross profit | $938.2 million | $935.0 million | +0.3% |
| Gross margin | 26.5% | 26.6% | -10 bps |
| Income from operations | $84.6 million | $82.7 million | +2.4% |
| Operating margin | 2.4% | 2.4% | Approximately stable |
| Net income | $68.0 million | $62.7 million | +8.4% |
| Net margin | 1.9% | 1.8% | +10 bps |
| Basic and diluted EPS | $2.53 | $2.33 | +8.6% |
| Cash flow from operations | $171.7 million | $150.3 million | +$21.4 million |
| Capital expenditures | $101.5 million | $95.7 million | +6.0% |
| Dividends paid | $33.4 million | $32.5 million | +2.5% |
Comparable-store sales increased 1.5% in 2019, compared with 0.7% in 2018. Comparable sales excluding fuel also increased 1.5%, versus 0.3% in 2018. Pharmacy revenue increased to $337.2 million, or 9.5% of sales, from $314.6 million, or 9.0%. Fuel revenue represented 3.6% of sales.
- Cash and cash equivalents were $66.9 million at year-end, up from $37.8 million.
- Working capital was $216.4 million, compared with $201.9 million.
- Marketable securities totaled $63.5 million, including $54.3 million of municipal bonds and $9.2 million of equity securities.
- Total assets were $1.676 billion and shareholders’ equity was $1.059 billion.
- The company reported no outstanding long-term debt at year-end. Its unsecured revolving credit facility matures September 1, 2022, has a $30.0 million committed capacity plus a discretionary $70.0 million, and had $18.8 million of availability after $11.2 million of letters of credit.
- Operating lease liabilities totaled $218.8 million on a present-value basis, with $258.6 million of undiscounted future lease payments.
Material changes versus the prior comparable period
- Sales growth accelerated modestly, supported by higher comparable-store sales, the Low, Low Price private-brand strategy, expanded product offerings and growth in Weis 2 Go Online.
- Gross margin declined slightly because of lower retail prices and costs in fuel, fruits, vegetables and eggs, as well as pressure on pharmacy gross profits. A favorable non-cash LIFO inventory adjustment increased 2019 gross profit by $5.8 million, compared with $1.5 million in 2018.
- Operating expenses increased only 0.1% despite higher sales. Utilities expense declined by $5.7 million, benefiting from purchasing initiatives and energy-efficiency investments; closure of unprofitable stores also improved expense ratios.
- Investment income and interest expense improved to $7.1 million of income from a $1.5 million expense, primarily reflecting investment performance, including a $2.0 million unrealized gain on equity securities compared with a $1.6 million loss in 2018.
- Operating cash flow increased 14.3%, helped by improved profitability and a $7.7 million reduction in inventory attributed to supply-chain efficiencies.
- Financing cash use fell to $33.4 million from $67.5 million because there were no debt repayments in 2019; dividends remained the principal financing outflow.
- The company adopted ASC 842 lease accounting effective December 30, 2018, adding approximately $202 million of right-of-use assets and $211 million of lease liabilities to the balance sheet without a significant impact on income or cash flow statements.
Guidance, outlook, risks and unusual items
Management planned approximately $120 million of capital investment in 2020 for new stores, remodels, technology, distribution facilities and transportation equipment. The company expects to continue regular quarterly dividends, subject to board approval and financial conditions. The filing does not provide formal revenue or earnings guidance.
- Strategic priorities include sales growth, private-brand development, customer convenience, online ordering and delivery, employee development, technology investment and sustainability.
- Weis 2 Go Online was available at 175 locations in the filing’s MD&A, including drive-through pickup at 154 locations; home delivery was available at 175 locations.
- Key risks include intense price and format competition, online grocery expansion, regional economic and weather conditions, wage and benefit inflation, fuel costs, food safety, labor availability, cybersecurity and information-technology disruptions, regulatory changes, vendor promotional allowances and self-insurance estimate variability.
- The company is exposed to market risk from its bond and equity portfolio and interest-rate changes affecting its revolving credit facility, although management considers these exposures not material.
- The company recorded no long-lived asset impairment in 2019, compared with a $1.5 million impairment charge in the fourth quarter of 2018.
- Routine legal proceedings and tax contingencies were disclosed; management believes they will not materially affect financial position, results or liquidity.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification checklist
- Reconcile the filing’s store-count descriptions: 198 stores at December 28, 2019 versus 197 stores after subsequent openings and closures, and the 197-store reference in MD&A.
- Assess the sustainability of the 1.5% comparable-store sales increase and the effect of the Low, Low Price strategy on gross margin.
- Separate recurring operating earnings from the $5.8 million LIFO benefit and the favorable $7.1 million investment-income result.
- Review the planned $120 million 2020 capital program against operating cash flow of $171.7 million and expected dividend payments.
- Evaluate lease obligations, store-closure exposure, self-insurance reserves and the $11.2 million of outstanding letters of credit.
- Monitor competitive pricing, pharmacy reimbursement practices, labor costs, fuel prices, vendor allowances and cybersecurity risks.
- Consider the Weis family’s approximately 65% voting control and its implications for shareholder governance.