Business Context and Reporting Period
Weis Markets, Inc. filed this unaudited Form 10-Q for the 13 weeks ended March 29, 2014, compared with the 13 weeks ended March 30, 2013. The company operated 166 retail food stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia, supported by a distribution facility, transportation fleet and three manufacturing facilities. The company reports one operating segment.
Financial Results and Key Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $687.1 million | $682.7 million | 0.6% |
| Gross profit | $186.8 million | $191.1 million | (2.3%) |
| Gross margin | 27.2% | 28.0% | Down 80 basis points |
| Operating income | $22.3 million | $30.9 million | (27.9%) |
| Operating margin | 3.2% | 4.5% | Down 130 basis points |
| Net income | $14.8 million | $20.1 million | (26.6%) |
| Basic and diluted EPS | $0.55 | $0.75 | (26.7%) |
| Operating cash flow | $34.2 million | $36.2 million | Down $2.0 million |
| Capital expenditures | $17.9 million | $30.0 million | Down $12.1 million |
Operating, general and administrative expenses increased 2.7% to $164.5 million, or 23.9% of sales versus 23.5% in the prior year. Investment income declined 22.9% to $0.8 million. The effective tax rate improved to 36.0% from 36.9%.
Cash and cash equivalents were $26.9 million at March 29, 2014, compared with $18.0 million at December 28, 2013. Marketable securities were $74.6 million, and total current assets were $412.8 million. Current liabilities were $199.4 million, and total liabilities were $316.2 million. Shareholders’ equity was $841.7 million.
The filing does not present a separate debt balance, and management states that the company expects to fund working capital and its planned capital program through cash and investment reserves and internally generated operating cash flow. Outstanding letters of credit totaled $18.9 million, primarily supporting performance, payment, deposit or surety obligations; management did not anticipate drawing on them.
The quarterly cash dividend was $0.30 per share, with $8.1 million paid during the quarter. The board subsequently approved another $0.30 per-share quarterly dividend payable May 19, 2014.
Material Changes Versus the Prior Comparable Period
- Total store sales increased 0.6%, while comparable store sales decreased 1.3%; excluding fuel, comparable sales decreased 1.2%.
- After adjusting for the Easter holiday shift, total store sales increased 1.7%, while adjusted comparable store sales decreased 0.3%. Easter benefited the first quarter of 2013 but was entirely in the second quarter of 2014.
- Management attributed the comparable-sales pressure to increased competition, lower SNAP spending following benefit reductions, cautious consumer behavior and weak economic conditions in certain markets.
- The company invested in the Three Ways to Save initiative, including Price Freeze, Everyday Lower Prices and Lowest Price Guarantee programs. These initiatives reduced gross margin to 27.2% from 28.0%.
- Employee-related costs decreased 4.0%, helped by a 51.4% decline in self-insured healthcare expenses. However, utility expense increased $1.0 million, or 9.3%, due primarily to unusually cold temperatures.
- Depreciation and amortization increased to $16.1 million from $13.8 million as the company continued its capital expansion program.
- The company recognized a $1.7 million pretax gain from selling property.
- Operating cash flow declined modestly despite a $9.8 million inventory reduction. Capital spending was substantially lower than in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
Management estimated that current 2014 development plans will require approximately $101.0 million of investment, including new superstores, remodels, site acquisitions, technology and distribution and transportation upgrades. Management expected to fund this program through existing cash and investment reserves and future operating cash flow.
Management expected diesel fuel prices to remain fairly steady through the second quarter of 2014, based on then-current government projections. The company continued to focus on promotional pricing, value programs, gas rewards, pharmacy growth and market-share retention.
- Key risks include intense competition, price pressure, weak economic conditions, declining household income, reduced SNAP benefits, fuel and utility cost volatility, labor and healthcare costs, regulatory changes including the Affordable Care Act, and the ability to recover higher costs through pricing.
- Management cautioned that competitors with greater financial resources could adversely affect the company’s competitive position.
- The company’s results may fluctuate because of interest-rate changes affecting available-for-sale securities and any future long-term borrowings.
- Marketable securities totaled $65.0 million at fair value in the detailed investment note; the balance sheet separately reported $74.6 million of marketable securities, reflecting the company’s broader classification and reclassification disclosures.
- No material subsequent events requiring disclosure were identified, and management reported no material changes in market risk or internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the gross-margin pressure from promotional pricing persists as the company balances traffic, market share and profitability.
- The sustainability of comparable-store sales, particularly after normalizing for the Easter holiday shift and unusual weather benefits.
- Progress and funding needs for the approximately $101.0 million 2014 capital expansion program.
- Whether operating cash flow remains sufficient to fund capital expenditures, dividends and other obligations without new borrowing.
- The effect of competition, SNAP participation and consumer spending trends on sales and transaction volumes.
- Potential changes in labor, healthcare, utility and fuel costs, and the company’s ability to recover them through pricing.
- The composition, valuation and interest-rate sensitivity of the company’s marketable securities portfolio.