Weis Markets, Inc. — Fiscal 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 27, 2014; 52 weeks. The filing is an annual report, not a quarterly filing, but it reports fourth-quarter results for the 13 weeks ended December 27, 2014. Weis operated 163 supermarkets across Pennsylvania, Maryland, New Jersey, New York and West Virginia, with approximately 18,200 full- and part-time associates. The Weis family controlled approximately 65% of voting power.
Financial Performance and Position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $2.777 billion | $2.693 billion | Up 3.1% |
| Gross profit | $753.0 million | $745.5 million | Up 1.0% |
| Gross margin | 27.1% | 27.7% | Down 0.6 percentage points |
| Operating income | $82.7 million | $111.2 million | Down 25.6% |
| Operating margin | 3.0% | 4.1% | Down 1.1 percentage points |
| Net income | $55.2 million | $71.7 million | Down 23.1% |
| Net margin | 2.0% | 2.7% | Down 0.7 percentage points |
| Diluted EPS | $2.05 | $2.67 | Down 23.2% |
| Operating cash flow | $123.1 million | $142.6 million | Down $19.5 million |
| Capital expenditures | $79.2 million | $128.1 million | Down $48.9 million |
| Dividends per share | $1.20 | $1.20 | Unchanged |
Fourth-quarter 2014 sales were $713.8 million, compared with $686.4 million in the prior-year quarter. Fourth-quarter net income was $13.9 million, or $0.51 per diluted share, compared with $15.7 million, or $0.59 per share.
At year-end, cash and cash equivalents were $23.0 million, marketable securities were $74.0 million and SERP investments were $9.1 million. Working capital was $223.8 million, compared with $211.5 million in 2013. Total assets were $1.191 billion and shareholders’ equity was $857.8 million.
The filing does not report outstanding borrowings or conventional debt. Financing cash outflows consisted solely of $32.3 million of dividends. The Company had $19.9 million of outstanding letters of credit and approximately $200.0 million of future operating-lease payments.
Material Changes Versus 2013
- Total store sales increased 3.1%; excluding fuel, sales increased 2.8%. Comparable-store sales increased 2.0%, or 1.7% excluding fuel.
- Sales growth reflected pricing initiatives and sales programs, including “Three Ways to Save,” Everyday Lower Prices, Price Freeze, Get Grillin’ and Lowest Price Guarantee.
- Gross margin declined because of lower pricing and promotional investments. The 2014 LIFO charge was $0.9 million, compared with $0.7 million in 2013.
- Operating, general and administrative expenses increased 5.7% to $670.3 million. Employee-related costs increased $7.7 million, although they declined as a percentage of sales.
- Depreciation and amortization increased to $66.9 million from $58.3 million, reflecting prior capital investments.
- Investment income fell to $2.3 million from $4.7 million, primarily because of fewer equity-security sale gains and a decline in the SERP investment.
- Net cash from operations declined despite higher sales, while capital expenditures fell substantially from the elevated 2013 level.
- The store count decreased from 165 to 163: one new store and one relocated store were added, while three stores were closed and one relocated store was closed.
Cash Flow, Capital Allocation and Outlook
Management expects approximately $91.8 million of capital investment in 2015 for new stores, remodels, acquisitions of sites, technology, distribution facilities and transportation equipment. The program is expected to be funded through cash and investment reserves and internally generated operating cash flow.
Management expected wholesale price inflation to increase slightly in 2015, excluding pharmacy, and anticipated diesel fuel prices below $3.00 per gallon during 2015 based on then-current projections. No formal earnings or sales guidance was provided in the filing.
Management emphasized sales growth, pricing competitiveness, store investment, supply-chain efficiency, inventory turns, customer loyalty, technology upgrades and sustainability. The Company had reduced enterprise carbon emissions by 14.8% since 2008 and targeted a 20% reduction by 2020.
Risks, Contingencies and Unusual Items
- Intense competition may require lower prices without corresponding reductions in product costs, pressuring margins.
- Regional concentration exposes results to local economic conditions, employment trends, inflation and severe weather, including snowfall.
- Labor, wage, benefit, healthcare, utility, fuel and other operating costs may rise faster than the Company can recover through pricing.
- Food-safety incidents, product recalls, vendor-promotion changes and supply disruptions could adversely affect sales, customer confidence and profitability.
- Information-technology disruptions or cybersecurity breaches could affect operations, payment data, health information, reputation, liquidity and litigation exposure.
- The Company self-insures significant workers’ compensation, liability, vehicle and healthcare risks. As of March 1, 2014, healthcare exposure became unlimited per member, subject to stop-loss insurance with a $500,000 specific deductible and $250,000 aggregating deductible.
- Marketable securities are exposed to interest-rate, credit, liquidity and equity-market risk. The portfolio had $8.3 million of gross unrealized gains and $96,000 of gross unrealized losses at year-end.
- Closed-store lease liabilities were $955,000. Management stated that routine litigation and other contingencies were not expected to have a material adverse effect.
- The Company recognized a $2.6 million pretax gain from property sales in 2014. There were no acquisitions in 2014 or 2013.
- The 2013 comparison included a $6.1 million former-CEO separation charge and a $2.1 million impairment charge, neither of which was reported for 2014.
Investor Verification Checklist
- Verify the sustainability of the 2014 comparable-store sales improvement and whether pricing programs can generate volume without further gross-margin erosion.
- Review the drivers of the 2014 decline in operating income and assess whether higher labor, utility and depreciation costs are recurring.
- Reconcile available cash, marketable securities, planned 2015 capital spending, dividends and operating-lease commitments against projected operating cash flow.
- Assess valuation and liquidity risk in the municipal-bond and equity-security portfolio, including sensitivity to higher interest rates.
- Review self-insurance reserves, stop-loss coverage and potential variability in healthcare, workers’ compensation and liability claims.
- Consider the effect of Weis family control, including approximately 65% voting ownership, on governance and shareholder influence.
- Confirm subsequent developments after December 27, 2014, including store openings or closures, capital spending, dividend decisions and changes in competitive conditions.