Village Super Market, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Fiscal second quarter and first half ended January 23, 2021; comparisons are with the periods ended January 25, 2020. Financial amounts below are in millions unless stated otherwise. Village operated 29 ShopRite, five Fairway Markets and three Gourmet Garage stores. Fairway was acquired in May 2020, so its results contribute to the current period but not the prior-year comparison.
Financial performance
| Metric | 13 weeks ended Jan. 23, 2021 | 13 weeks ended Jan. 25, 2020 | 26 weeks ended Jan. 23, 2021 | 26 weeks ended Jan. 25, 2020 |
|---|---|---|---|---|
| Sales | $522.8 (+19.5%) | $437.4 | $1,013.0 (+19.9%) | $844.8 |
| Gross profit / margin | $141.8 / 27.13% | $117.9 / 26.96% | $279.8 / 27.62% | $231.5 / 27.40% |
| Operating income / margin | $6.6 / 1.26% | $2.4 / 0.55% | $11.5 / 1.13% | $5.4 / 0.64% |
| Net income / margin | $4.6 / 0.87% | $2.0 / 0.46% | $7.9 / 0.78% | $4.6 / 0.55% |
Reported net income increased 127% for the quarter and 73% for the half year. Management said net income, excluding specified prior-year pension, store-opening and closure charges, rose 28% and 15%, respectively. Diluted EPS for Class A was $0.31 for the quarter and $0.54 for the half year; Class B diluted EPS was $0.23 and $0.39.
- Sales and margins: Same-store sales increased 6.5%. Digital sales increased 176% for the quarter and 174% for the half year. Management attributed demand gains mainly to COVID-19-related shopping patterns, including larger baskets and fewer transactions. Manhattan Fairway and Gourmet Garage stores faced weaker sales amid population outmigration and reduced commuter and tourist traffic.
- Profitability drivers: Fairway contributed to higher reported gross margins, while its integration and commissary transition increased costs. Excluding Fairway, gross margin declined year over year in both periods, reflecting lower departmental margins, product mix and Wakefern warehouse charges, partly offset by lower promotions and patronage dividends. COVID-related safety and wage costs, Fairway occupancy expense and digital-sales costs also weighed on operating expenses.
- Cash flow: First-half operating cash flow was $24.9, versus $27.8 a year earlier. Investing cash use was $11.0, including $10.0 of capital expenditures; financing cash use was $10.8, including $6.5 of dividends and $4.1 of debt principal payments. Cash increased $3.1 to $114.8.
- Liquidity and debt: Working capital was $38.2 and the current ratio was 1.24 at January 23, 2021. Debt excluding lease obligations was $77.4, down from $80.6 at July 25, 2020; cash exceeded this debt by approximately $37.4. The company had no revolving-line borrowings and reported $7.3 of letters of credit outstanding. It was in compliance with credit-facility covenants.
Material changes and notable items
- Fairway’s five supermarkets, production distribution center and related intellectual property were acquired in May 2020 for $73.6, net of cash acquired. Management described Fairway sales and operating profits as below initial expectations, principally because of the pandemic’s effect on Manhattan traffic and population.
- During the first half, $50.0 of revolving borrowings was converted into a secured term loan. The revolving facility’s maximum availability was reduced from $125.0 to $75.0. Interest-rate swaps hedge variable-rate loans, with $72.0 of notional value outstanding at period end.
- On February 22, 2021, after the reporting date, the company closed its Silver Spring, Maryland ShopRite. Management said the financial impact would not be material.
- Prior-year comparisons included pension settlement, Stroudsburg store-opening and old-store closure costs; those items increased prior-year expenses and affect reported growth comparisons.
Outlook, risks and contingencies
- Management estimated fiscal 2021 same-store sales would be flat to slightly down, with first-half positive trends offset by expected second-half declines as pandemic-related comparisons normalize. It expected lower gross margins excluding acquired stores, reflecting continued price investment.
- Fiscal 2021 capital expenditures were revised to approximately $25.0. The Board intended to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management expected cash, operating cash flow and the credit facility to meet foreseeable requirements; it projected a 30%–31% effective tax rate and approximately $1.4 of pension costs.
- Key uncertainties include the duration and effects of COVID-19, Fairway integration and performance, intense competition and narrow grocery margins, dependence on Wakefern for substantially all merchandise and key services, collective bargaining and pension costs, and potential food-safety, insurance, impairment and cybersecurity exposures. Approximately 90% of employees were covered by collective bargaining agreements.
- Management considered ordinary-course litigation unlikely to materially affect financial position, results or liquidity. The filing reported no material change in disclosure controls and procedures.
Investor verification points
- Track same-store sales, digital sales and Manhattan Fairway/Gourmet Garage performance as pandemic effects and comparisons change.
- Assess whether Fairway integration and commissary costs, pricing investments and other expense pressures allow margins to hold up.
- Monitor operating cash flow, planned capital spending, dividends, debt repayment and availability under the revolving facility and covenant compliance.
- Verify the effect of the Silver Spring closure and any subsequent changes in store portfolio or integration plans.
- Review Wakefern-related balances and exposure, pension and multi-employer obligations, and any developments in the risks and contingencies disclosed.