Village Super Market, Inc. — Q1 FY2016 Form 10-Q
Reporting period: 13 weeks ended October 24, 2015; unaudited. Dollar amounts below are in thousands unless stated otherwise. Village operated 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania and relied substantially on Wakefern as its merchandise supplier.
Financial performance and liquidity
| Metric | Q1 FY2016 | Prior-year quarter |
|---|---|---|
| Sales | $389,529 | $379,744 |
| Gross profit / margin | $105,487 / 27.08% | $102,803 / 27.07% |
| Operating income / margin | $8,191 / 2.11% | $7,912 / 2.08% |
| Net income | $4,430 | $3,879 |
| Net income per share, basic (Class A / Class B) | $0.35 / $0.23 | $0.31 / $0.20 |
| Net cash from operating activities | $5,415 | $51 |
Sales and same-store sales each rose 2.6%. Net margin increased to 1.14% from 1.02%. Cash and equivalents were $56,150 at quarter-end, down from $59,040 at fiscal year-end. Working capital was $43,260 and the current ratio was 1.5:1.
Operating cash flow was $5,415; investing activities used $4,428, including $5,328 of capital expenditures and $900 proceeds from a property sale. Financing activities used $3,877, including $3,164 of dividends, $490 of treasury-stock purchases and $223 of long-term debt principal payments. Cash declined $2,890 during the quarter.
Quarter-end debt included $43,575 of capital and financing lease obligations and $1,763 of Wakefern notes payable, of which $1,141 was current. No borrowings were outstanding under the $25,000 revolving credit facility. The facility was extended on December 1, 2015 through December 31, 2017. The company also held $41,421 of notes receivable from Wakefern and $26,467 in Wakefern investment.
Changes and management commentary
- Gross margin improved 0.01 percentage point, primarily from lower promotional spending, partly offset by lower departmental gross margin percentages.
- Operating and administrative expense rose to $91,338 from $88,988. As a share of sales it was up 0.02 percentage point year over year; excluding the prior-year Sandy insurance-receivable write-off, the ratio increased 0.62 percentage point. Management cited higher fringe-benefit costs, payroll, and legal and consulting fees.
- Net income increased year over year, but the comparison benefited from prior-year items: a $1,340 after-tax Sandy insurance write-off and $404 of accrued interest and penalties related to a New Jersey tax dispute. Excluding those items, management said net income decreased 21%, primarily due to higher operating and administrative expenses.
- The effective tax rate was 41.9%, compared with 47.5% a year earlier; excluding prior-year tax-dispute interest and penalties, the prior-year rate was 42.1%.
- Management attributed the operating-cash-flow increase largely to timing changes in payables. The Stirling store expansion and remodel was completed in October 2015.
Outlook, risks and contingencies
- Fiscal 2016 same-store sales are expected to increase 1%–3%; planned capital expenditures are $25,000, including Stirling work, two major remodels and several smaller remodels.
- The Board’s current intention is to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management expects a 41%–42% effective tax rate and believes available cash and operating cash flow will cover foreseeable needs. It expects increased medical and pension costs.
- Management expects to contribute approximately $3,000 to its defined-benefit pension plans in fiscal 2016; no contributions had been made in the quarter. The filing also notes potential increases in multi-employer plan contributions and possible withdrawal liabilities.
- Superstorm Sandy insurance recovery remains uncertain. Village had collected $2,643 of the $4,913 previously recorded; after an adverse court decision, it wrote off the remaining receivable in the prior-year quarter. Wakefern continued to pursue further recovery, but Village stated additional proceeds were not probable.
- The company settled New Jersey tax disputes in March 2015 for a $33,000 payment, with an approximately $21,000 net cash outflow after federal benefit. It recorded a $7,293 net tax benefit in the quarter ended April 25, 2015 to reverse excess unrecognized tax benefits and related interest and penalties. Unrecognized tax benefits were $535 at October 24, 2015.
- Key disclosed risks include intense supermarket competition and narrow margins; concentration in New Jersey and weaker-than-projected Maryland store performance; dependence on Wakefern; labor and healthcare costs, collective bargaining and pension obligations; food safety; asset impairment; tax examinations; and information-system interruption or cybersecurity breaches.
- Other litigation is described as incidental to normal business; management did not expect its resolution to materially adversely affect financial position, results or liquidity. Disclosure controls were evaluated as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether sales growth and the 1%–3% fiscal-year same-store sales outlook are sustained, particularly as replacement-store comparisons mature.
- Whether operating expenses—especially healthcare, pension, payroll and professional fees—continue to rise and pressure narrow margins.
- Cash conversion and working-capital timing: operating cash flow was substantially higher than the prior-year quarter, which management linked mainly to payable timing.
- Execution and funding of the $25,000 fiscal 2016 capital program, pension contributions, dividends and share repurchases; confirm the updated credit-facility terms and any future borrowing.
- Developments in Wakefern-related exposure, Sandy insurance recovery, tax matters and pension-plan funding or withdrawal liabilities.