Business context and reporting period
Village Super Market, Inc. operates 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania and is a major member of Wakefern, its principal supplier. This unaudited Form 10-Q covers the 13 and 26 weeks ended January 24, 2015; comparative periods ended January 25, 2014. Amounts below are in thousands of dollars except per-share data and percentages.
Financial results and liquidity
| Metric | 13 weeks ended Jan. 24, 2015 | 13 weeks ended Jan. 25, 2014 | 26 weeks ended Jan. 24, 2015 | 26 weeks ended Jan. 25, 2014 |
|---|---|---|---|---|
| Sales | $411,191 | $392,241 | $790,935 | $749,287 |
| Gross profit | $111,126 | $105,358 | $213,929 | $199,064 |
| Operating income | $12,661 | $5,857 | $20,573 | $12,106 |
| Net income (loss) | $6,603 | $2,818 | $10,481 | $(4,012) |
| Operating cash flow | Not presented separately | Not presented separately | $35,620 | $31,088 |
Second-quarter sales rose 4.8%; six-month sales rose 5.6%. Same-store sales increased 2.2% and 1.9%, respectively. Gross margin was 27.03% for the quarter and 27.05% for the six months, versus 26.86% and 26.57%. Operating margin was 3.09% and 2.60%, versus 1.49% and 1.62%. Net margin was 1.61% and 1.33%, versus 0.72% and (0.54%).
At January 24, 2015, cash and cash equivalents were $94,762 and working capital was $25,957, compared with $77,352 and $16,782 at July 26, 2014. The current ratio was 1.2, versus 1.1. Total current liabilities were $149,562. Long-term debt was $44,881, consisting primarily of capital and financing lease obligations ($43,939) and Wakefern notes payable ($942); current lease obligations and Wakefern notes payable were $448 and $456. Cash flow from operations increased to $35,620. Capital expenditures were $9,923, dividends paid were $6,266, and cash increased by $17,410 over the six-month period.
Material changes and unusual items
- Quarterly earnings improved alongside higher sales, stronger gross margin and lower operating expenses. Management attributed sales gains to the replacement stores in Union and greater Morristown, as well as higher same-store transaction size from inflation; units sold declined.
- Prior-year results included charges for the Morris Plains store closure and replacement-store pre-opening costs. Excluding those items, quarterly net income increased 24%, according to management. For the six-month comparison, management reported a 35% increase in net income excluding specified unusual items: the current-period Sandy insurance write-off and prior-year New Jersey tax, store-closure and pre-opening charges.
- In the first quarter of fiscal 2015, the company recorded a $2,270 charge to write off the remaining Superstorm Sandy insurance receivable after a court decision favored the insurer; $2,643 of the previously recorded $4,913 recovery had been collected.
- On February 27, 2015, after the reporting date, the company agreed to pay approximately $33,000 to settle New Jersey tax disputes for fiscal 2000–2014. Expected net cash outflow after federal tax benefit is $21,000–$22,000, subject to adjustment. The company expects to reverse excess unrecognized tax benefits, interest and penalties and record an estimated $7,000–$8,000 income tax benefit in the quarter ending April 25, 2015. Gross unrecognized tax benefits were $30,912 at January 24, 2015; accrued interest and penalties were $17,512.
Outlook, risks and contingencies
Management expects fiscal 2015 same-store sales growth of 1.5%–2.5%, modest retail price inflation and capital expenditures of $25,000, including three major remodels and smaller projects. The board’s current intention is to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Excluding the anticipated tax-settlement benefit and previously accrued settlement-related interest and penalties, management expects a fiscal 2015 effective tax rate of 41.5%–42.5%. It expects higher medical and pension costs, and approximately $6,000 of pension contributions in fiscal 2015. Management believes cash and operating cash flow will cover foreseeable working capital, capital expenditure and debt requirements.
Key risks include intense competition and narrow supermarket margins; geographic concentration in New Jersey; weaker-than-typical Maryland store performance; reliance on Wakefern for merchandise, services and patronage dividends; labor and collective bargaining exposure (approximately 91% of employees are covered by agreements); rising healthcare and pension costs, including underfunded multi-employer plans; food safety; store-asset impairment; and information-system interruption or cybersecurity breaches. The company also holds $69,309 in demand deposits and $41,421 in notes receivable from Wakefern, exposing it to Wakefern credit and interest-rate risks. Management stated that other ordinary-course litigation is not expected to materially affect financial position, results or liquidity; the tax settlement is a significant exception.
Important facts for investors to verify
- Confirm final payment and tax-return adjustments under the New Jersey settlement, the realized net cash outflow, and the timing and amount of the anticipated tax benefit.
- Track same-store sales, transaction size and units sold, and whether the replacement stores and Maryland locations improve performance.
- Compare realized margins and operating costs with guidance, particularly promotional spending, patronage dividends, healthcare and pension costs.
- Monitor cash generation, remodel spending, dividend payments, lease and Wakefern obligations, pension funding, and Wakefern deposit and note exposure.
- Assess the effects of the Sandy insurance write-off and any further insurance recovery; the filing says further recovery was not considered probable.