Business context and reporting period
Ingles Markets, Inc. operates supermarkets in the southeastern United States, with related fluid dairy and shopping-center rental operations. This unaudited Form 10-Q covers the 13 weeks ended December 26, 2020 (fiscal Q1 2021); comparable period was the 13 weeks ended December 28, 2019. Unless noted, amounts are in U.S. dollars.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $1,190.4 million | $1,078.4 million |
| Gross profit / margin | $314.2 million / 26.4% | $257.5 million / 23.9% |
| Operating income / margin | $76.4 million / 6.4% | $38.5 million / 3.5% |
| Net income / margin | $53.8 million / 4.5% | $17.7 million / 1.6% |
| Interest expense | $6.4 million | $11.9 million |
| Net cash from operations | $57.8 million | $16.2 million |
| Capital expenditures | $34.2 million | $31.1 million |
Class A basic and diluted EPS were $2.73 and $2.66, respectively, versus $0.90 and $0.87. Class B basic and diluted EPS were each $2.48 versus $0.82. Quarterly dividends were $0.165 per Class A share and $0.15 per Class B share.
Financial position and liquidity
At December 26, 2020, cash was $10.0 million, current assets $498.0 million, and current liabilities $318.4 million. Total assets were $1.929 billion and stockholders’ equity was $872.0 million. Current and long-term debt totaled approximately $587.9 million, compared with approximately $605.5 million at September 26, 2020. The company had $25.0 million outstanding on its $175.0 million revolving line of credit and $1.1 million of unused letters of credit issued. Cash increased $3.1 million during the quarter; investing activities used $33.6 million and financing activities used $21.0 million.
Material changes and management commentary
- Sales rose 10.4%; excluding gasoline, comparable grocery sales increased 15.2%. Excluding gasoline, transactions decreased 4.3% while average transaction size increased 16.8%, which management attributed to customers consolidating shopping trips during the pandemic.
- Management attributed stronger gross margin to less discounting and shrink and a higher gasoline gross margin. Operating and administrative expenses rose 7.3% in dollars but declined to 20.0% of sales from 20.6%, as sales grew faster than expenses.
- Gasoline sales were lower because of weaker pandemic-related demand and oversupply. The company operated 197 stores versus 198 a year earlier and closed one store over the prior 12 months.
- Interest expense declined amid lower debt and lower LIBOR. The prior-year quarter included a $3.7 million loss on early extinguishment of debt; none was recorded in the current quarter.
Outlook, risks and other notable items
Management planned fiscal 2021 capital expenditures of approximately $100–$120 million and indicated annual spending of approximately $100–$160 million going forward to maintain and modernize stores. It did not provide earnings or sales guidance. Management believed available cash flows, the credit line, and expected financing would fund planned spending and working capital needs, while noting financing may not be available on acceptable terms.
Management said COVID-19-related measures continued to affect operations and grocery demand; future pandemic effects remain uncertain. Other cited risks include competition, economic conditions, food supply disruptions, labor and utility costs, gasoline prices, financing availability, and execution of store expansion and real-estate plans. Debt agreements include financial covenants and cross-default provisions; the company reported compliance at quarter-end. Interest-rate swaps had aggregate notional principal of $187.0 million. Management did not expect pending ordinary-course legal matters to materially affect results or financial condition. Self-insurance reserves totaled $34.5 million, including $4.8 million of expected recoveries. Disclosure controls were reported effective as of December 26, 2020.
Important facts for investors to verify
- Whether elevated pandemic-driven grocery sales and margins are sustainable, particularly given lower transactions and gasoline demand.
- Execution and returns on the planned $100–$120 million fiscal 2021 capital program and the company’s longer-term spending plans.
- Debt balances, floating-rate exposure, swap valuations, covenant restrictions, and availability of the revolving credit facility.
- Changes in self-insurance claims and reserves, vendor allowances, and other operating costs.
- Dividend continuation and capacity under debt-agreement restrictions; the filing describes the dividend as subject to board discretion.