Weis Markets, Inc. — 2017 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Weis Markets operates 204 supermarkets with approximately 23,000 associates across Pennsylvania and six surrounding states. The company reports one operating segment. This unaudited Form 10-Q covers the 13 weeks ended April 1, 2017, compared with the 13 weeks ended March 26, 2016.
Results include stores acquired in 2016: five Mars Super Market stores, 38 former Food Lion stores, and one Nell’s Family Market store. The acquired stores contributed $121.0 million of first-quarter 2017 sales. The company opened a 65,000-square-foot “Community Market” prototype store in Enola, Pennsylvania, in March 2017.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $852.2 million | $738.2 million | 15.4% |
| Gross profit | $229.8 million | $207.1 million | 11.0% |
| Gross margin | 27.0% | 28.1% | Down 1.1 points |
| Operating income | $20.3 million | $31.3 million | Down 35.2% |
| Operating margin | 2.4% | 4.2% | Down 1.8 points |
| Net income | $11.8 million | $20.1 million | Down 41.2% |
| Net margin | 1.4% | 2.7% | Down 1.3 points |
| Diluted EPS | $0.44 | $0.75 | Down 41.3% |
| Cash dividend per share | $0.30 | $0.30 | Unchanged |
Comparable-store sales decreased 0.3%, or 0.9% excluding fuel. Adjusted for the timing of holidays, comparable-store sales increased 1.1%, or 0.5% excluding fuel. Identical customer visits increased 0.7%, while average sales per transaction decreased 3.3%.
Operating cash flow was $14.6 million, compared with $38.1 million in the prior-year quarter. Capital expenditures were $17.1 million, compared with $29.9 million. Cash dividends paid were $8.1 million. Cash and cash equivalents declined to $12.3 million from $14.7 million at December 31, 2016.
At April 1, 2017, total assets were $1.40 billion and shareholders’ equity was $930.6 million. Marketable securities totaled $64.3 million. Long-term debt was $70.9 million, compared with $64.5 million at year-end 2016. The company had $70.9 million borrowed under a $120.0 million revolving facility, $16.7 million committed to letters of credit, and $32.4 million of unused availability.
Material Changes Versus the Prior Comparable Period
- Sales growth primarily reflected the 2016 acquisitions and higher fuel sales; reported sales also benefited from the acquired store base.
- Comparable-store performance was pressured by food deflation, winter weather, and unfavorable holiday timing. Management estimated that the absence of the prior-year Easter and New Year holiday periods reduced the comparison by approximately $10.1 million, while winter weather reduced comparable sales by approximately $7 million.
- Gross margin declined because of lower comparable sales volume, higher distribution costs, deflation-related pricing pressure, increased diesel costs, and the product mix of acquired stores.
- Operating expenses increased 19.2%, faster than sales. Direct store labor, including costs attributable to acquired stores, was a significant driver; employee-related expenses increased $18.5 million.
- The effective tax rate increased to 43.8% from 36.9% because of a discrete item and higher state tax expense.
- Operating cash flow declined partly because of lower operating income and $11.8 million of long-term incentive payments to associates.
- Investment income increased to approximately $1.1 million from $637,000, contributing to the increase in investment income and interest expense reported in the income statement.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management planned approximately $90.0 million of 2017 capital investment for new stores, remodels, site acquisitions, technology, distribution facilities, and transportation equipment. Management expected operating cash flow and revolving-credit availability to fund working capital, debt obligations, capital expenditures, acquisitions, and dividends.
Management stated that the acquired store group was generating positive cash flow and that it continued to evaluate acquisition opportunities, although no acquisitions were pending. The company expected to continue quarterly dividends, subject to board approval and operating and financial conditions. The board approved a $0.30-per-share dividend payable May 22, 2017.
The revolving facility matures September 1, 2019, bears interest at one-month LIBOR plus a 0.65% margin, and includes a minimum EBITDA covenant of $75.0 million. Letters of credit primarily support performance, payment, deposit, or surety obligations, and the company did not anticipate drawing on them.
Key risks include intense competition, price pressure, changing retail conditions, economic conditions, regulatory developments, technology changes, capital-spending requirements, healthcare costs, and the potential impact of food and fuel price volatility. The company noted that the Affordable Care Act could affect future operating expenses. No material changes in market risk were reported.
The company expects future adoption of the revenue-recognition standard to have no significant impact on point-of-sale product sales. Adoption of the financial-instruments standard may affect reported net income, and the lease standard is expected to have a significant effect on the balance sheet. No material subsequent events were identified. Management concluded that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether acquired-store sales growth translates into sustainable comparable-store sales and improved operating margins.
- Progress in integrating acquired stores, realizing expected efficiencies, and managing additional transportation and labor costs.
- Cash generation relative to the planned $90.0 million capital program, dividends, debt service, and acquisition spending.
- Revolving-credit utilization, remaining availability, letters of credit, interest-rate exposure, and compliance with the $75.0 million minimum EBITDA covenant.
- The effect of food deflation, fuel prices, competitive pricing, weather, and holiday timing on future sales and gross margins.
- Potential changes in net income from adoption of the financial-instruments accounting standard and the expected balance-sheet impact of lease accounting.
- The sustainability of the $0.30 quarterly dividend given lower earnings and reduced operating cash flow.