Weis Markets, Inc. — Fiscal 2011 Form 10-K Summary
Business context and reporting period
Weis Markets operates supermarkets, pharmacies, fuel locations and related food businesses in Pennsylvania and four surrounding states. The Company operated 161 stores at December 31, 2011, including 160 Weis Markets stores and one Save-A-Lot store, and reported one operating segment. Fiscal 2011 included 53 weeks, compared with 52 weeks in fiscal 2010 and 2009.
The filing was signed March 15, 2012. The fourth quarter included 14 weeks ended December 31, 2011.
Financial performance and liquidity
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net sales | $2.753 billion | $2.620 billion | +5.0% |
| Gross profit | $735.9 million | $713.6 million | +3.1% |
| Gross margin | 26.7% | 27.2% | Down 50 bps |
| Operating income | $114.3 million | $105.3 million | +8.5% |
| Operating margin | 4.2% | 4.0% | Up 20 bps |
| Net income | $75.6 million | $68.3 million | +10.7% |
| Diluted EPS | $2.81 | $2.54 | +10.6% |
| Operating cash flow | $152.4 million | $146.7 million | +3.9% |
Fourth-quarter net sales were $737.8 million, gross profit was $191.5 million, net income was $19.3 million and diluted EPS was $0.72. Comparable-store sales increased 6.1% for the full 53-week year, or 4.2% after adjusting for the extra week; excluding fuel and the extra week, comparable-store sales increased 3.5%.
At year-end, cash and cash equivalents were $37.4 million, marketable securities were $89.3 million, working capital was $220.0 million and shareholders’ equity was $745.9 million. The filing does not report outstanding debt; management was considering short- and long-term credit facilities for working capital and potential acquisitions. Letters of credit totaled $15.9 million, and management did not expect to draw on them.
Net cash used in investing activities was $165.8 million, including $110.5 million of property and equipment purchases and $81.9 million of marketable securities purchases. Net cash used in financing activities was $58.4 million, primarily dividends. Total dividends increased to $2.17 per share from $1.16 in each of the prior two years, including a special dividend in the fourth quarter.
Material changes versus the prior comparable period
- Sales and earnings increased, supported by higher comparable-store sales, increased transaction size and customer visits, and the additional fiscal week.
- Gross margin declined to 26.7%, principally amid significant wholesale price inflation and an $8.7 million LIFO charge, versus a $2.9 million charge in 2010.
- Operating margin improved as operating, general and administrative expenses fell to 22.6% of sales from 23.2%. Utility costs declined 6.3%, while electronic payment interchange fees increased 8.3% to $19.3 million.
- Capital spending increased substantially to $110.5 million from $69.9 million. The store base declined from 164 to 161 after one new store, one relocation and four closures, partially offset by nine additions or major remodels.
- Cash declined by $71.7 million, primarily because of higher capital spending, marketable securities purchases and the special dividend. Marketable securities increased from $25.8 million to $89.3 million.
- Product-category mix shifted modestly: center-store sales declined to 59.9% of sales from 60.9%, while fuel increased to 3.1% from 2.3%.
Guidance, outlook, risks and unusual items
Management estimated that current development plans would require approximately $125.0 million of investment in 2012, to be funded through cash and investment reserves and internally generated operating cash flow. Management expected moderate wholesale-price inflation and continued increases in diesel fuel prices in 2012.
Key risks include intense price competition, regional economic and weather conditions, food-safety events, information-technology disruptions or security breaches, labor and health-care cost inflation, fuel and utility volatility, rising payment-card interchange fees, regulatory changes, self-insurance claim variability, market and interest-rate risk in the investment portfolio, and the Weis family’s approximately 65% voting control.
Unusual or notable items included the special dividend, the $8.7 million LIFO charge, gains on sales of marketable securities, increased cardboard-salvage income, and the absence of acquisitions in 2011. Closed-store lease liabilities were $756,000 at year-end. Routine litigation was not expected to have a material adverse effect. Grant Thornton LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile fourth-quarter performance with the 14-week period and assess the effect of the extra week on year-over-year growth.
- Evaluate whether gross-margin pressure from food inflation, LIFO accounting and competitive pricing persists.
- Confirm the funding plan and returns expected from the approximately $125 million 2012 capital program.
- Monitor cash deployment, the large increase in marketable securities, and whether the Company establishes a credit facility.
- Review the sustainability of the special dividend and the resulting reduction in cash balances and working capital.
- Assess exposure to fuel costs, labor and medical costs, payment-card fees, self-insurance claims and investment-market volatility.
- Consider governance and control implications of the Weis family’s approximately 65% voting power.