Weis Markets, Inc. — 2012 First-Quarter Form 10-Q
Business Context and Reporting Period
Weis Markets operated 161 retail food stores in Pennsylvania and four surrounding states as of March 31, 2012. The company reports one operating segment and generates revenue primarily from retail food, pharmacy, fuel, prepared foods, and general merchandise sales. This filing covers the unaudited 13 weeks ended March 31, 2012, compared with the 13 weeks ended March 26, 2011.
Financial Performance and Position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $661.6 million | $659.5 million | 0.3% |
| Gross profit | $183.1 million | $178.5 million | 2.6% |
| Gross margin | 27.7% | 27.1% | +0.6 percentage points |
| Operating income | $30.4 million | $28.3 million | 7.7% |
| Operating margin | 4.6% | 4.3% | +0.3 percentage points |
| Net income | $20.0 million | $18.6 million | 7.7% |
| Basic and diluted EPS | $0.74 | $0.69 | 7.2% |
| Operating cash flow | $23.0 million | $32.3 million | Decrease |
| Capital expenditures | $13.0 million | $22.7 million | Decrease |
| Cash and cash equivalents at period-end | $37.2 million | $88.4 million at prior-year period-end | Not directly comparable |
Operating, general and administrative expenses increased 1.6% to $152.7 million, and increased to 23.1% of sales from 22.8%. Employee-related costs increased 4.4%, while self-insured health-care costs increased 12.3%. The effective tax rate was 36.4%, compared with 36.6%.
At March 31, 2012, total assets were $1.04 billion, total liabilities were $286.8 million, and shareholders’ equity was $757.7 million. The filing reports no debt outstanding on the balance sheet. Marketable securities totaled $91.4 million, primarily municipal bonds and equity securities. The company had $13.0 million of outstanding letters of credit and did not anticipate drawing on them.
The company paid $8.1 million in dividends during the quarter, or $0.30 per share, compared with $0.29 per share in the prior-year quarter. The board approved another quarterly dividend of $0.30 per share payable May 21, 2012.
Material Changes Versus the Prior Comparable Period
- Comparable-store and total-store sales increased 0.9%; excluding fuel, comparable-store sales increased 0.3% and total sales increased 0.2%.
- Average sales per customer transaction increased 2.1%, while identical customer store visits declined 1.1%.
- Gross margin improved despite food-cost inflation and an 11.5% increase in diesel fuel costs.
- Utility expense declined 12.2%, and snow-removal expense decreased $503,000 because of milder weather and contractual arrangements.
- Produce sales increased 1.9% and floral sales increased 17.3%, partly due to seasonal timing and favorable weather.
- Operating cash flow declined primarily because inventory increased $14.0 million, influenced by the timing of Easter.
- Investing cash use declined to $15.1 million from $45.2 million, reflecting lower purchases of marketable securities and property and equipment.
- Effective January 1, 2012, the company changed depreciation for buildings, improvements, and equipment from accelerated methods to straight-line prospectively. The company stated that first-quarter depreciation would have been $2.9 million higher under the former method, reducing net income by approximately $1.6 million, or $0.06 per share, after tax.
Guidance, Outlook, Risks, and Unusual Items
Management estimated that its 2012 capital expansion program would require approximately $125.0 million, including new superstores, remodels, site acquisitions, technology, and distribution-facility upgrades. Management expected to fund working capital and capital expenditures with cash and investment reserves and internally generated operating cash flow, while also considering short- and long-term credit facilities for working capital and potential acquisitions.
Management cited continued economic weakness, high unemployment, cautious consumer spending, intense competition, food-cost inflation, fuel-price volatility, rising health-care expenses, utility costs, regulatory changes, and pricing pressure as risks. The company expected diesel fuel prices to continue increasing and stated that it may not be able to recover higher costs through retail pricing.
The company continued its Price Freeze, Get Grillin’, Gas Rewards, and Gold Card programs to support value-oriented customers and market share. Management stated that it remained confident in its ability to generate sales growth but warned that competitors with greater financial resources could adversely affect its competitive position.
No material changes in market risk were reported. Management concluded that disclosure controls and procedures were effective as of March 31, 2012, and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Assess the sustainability of the gross-margin improvement after the company’s promotional programs, food inflation, and fuel-cost increases.
- Evaluate whether the $125.0 million capital program can be funded from reserves and operating cash flow without increasing leverage.
- Monitor inventory growth and working-capital requirements following the Easter-related buildup.
- Adjust year-over-year earnings analysis for the prospective depreciation-method change and its effect on reported expenses.
- Review the impact of employee-related costs, health-care inflation, and the Affordable Care Act on future operating margins.
- Monitor customer traffic declines, competitive pricing, and the company’s ability to pass through inflationary costs.
- Verify the treatment, liquidity, and credit exposure of the $91.4 million marketable-securities portfolio and the $13.0 million in letters of credit.