Weis Markets, Inc. 2015 Form 10-K Summary
Business context and reporting period
Weis Markets operates 163 conventional supermarkets in Pennsylvania, Maryland, New Jersey, New York and West Virginia, supported by distribution, transportation and manufacturing operations. The Company reports one operating segment. Fiscal 2015 comprised 52 weeks ended December 26, 2015; fiscal 2014 also comprised 52 weeks ended December 27, 2014. The Weis family owned approximately 65% of the voting power.
For the fourth quarter, the 13 weeks ended December 26, 2015 generated net sales of $734.1 million and net income of $16.6 million, compared with $713.8 million and $13.7 million, respectively, in the prior-year quarter.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $2.877 billion | $2.777 billion | 3.6% increase |
| Gross profit | $786.7 million | $753.0 million | 4.5% increase |
| Gross margin | 27.3% | 27.1% | 20 basis-point increase |
| Operating income | $90.8 million | $81.4 million | 11.6% increase |
| Operating margin | 3.2% | 2.9% | 30 basis-point increase |
| Net income | $59.3 million | $54.4 million | 9.1% increase |
| Diluted EPS | $2.21 | $2.02 | 9.4% increase |
| Operating cash flow | $136.7 million | $123.1 million | Increase |
| Capital expenditures | $90.2 million | $79.2 million | Increase |
At year-end, cash and cash equivalents were $17.6 million, marketable securities were $91.6 million and SERP investments were $9.1 million. Working capital was $232.7 million, total assets were $1.236 billion and shareholders’ equity was $871.7 million. The filing does not report outstanding long-term debt or borrowings. Weis had a $30 million line of credit, with $16.9 million committed to letters of credit, and a $50 million short-term credit facility; management did not expect to draw on the letters of credit.
Investing cash outflows were $109.8 million, primarily for property and equipment and marketable securities. Financing cash outflows were $32.3 million, consisting entirely of dividends. The annual dividend was $1.20 per share, and no shares were repurchased.
Material changes versus the prior comparable period
- Total store sales increased 3.6%; comparable-store sales increased 3.7%, or 4.4% excluding fuel.
- Identical customer visits increased 4.1%, while average sales per transaction declined 0.2%.
- Comparable pharmacy sales increased 7.4%, fresh sales increased 6.0%, produce sales increased 5.9% and health and beauty care sales increased 5.0%.
- Comparable fuel sales declined 25.4% because of substantially lower retail fuel prices; fuel represented 3.2% of consolidated sales versus 3.9% in 2014.
- Gross margin improved primarily because of the shift from lower-margin fuel sales toward grocery sales.
- Operating, general and administrative expense increased 3.6%. Employee-related expenses increased $19.4 million, including a $3.2 million estimated second-half cost from raising the base hourly wage to $9 per hour and $7.3 million from management incentives.
- Investment income declined to $1.6 million from $2.3 million, including a loss on SERP investments.
- The Company purchased a store in Hanover, Pennsylvania for $7.9 million and completed 16 additions or major remodels. Store count remained 163.
Guidance, outlook, risks and unusual items
Management planned approximately $100 million of capital investment in fiscal 2016 for new stores, remodels, sites, technology, distribution and transportation. The Company expected wholesale price inflation to increase slightly in 2016 and cited an energy-industry projection that diesel prices would remain below $2.50 per gallon during 2016. The filing does not provide formal revenue or earnings guidance.
- The retail grocery market is highly price competitive, creating pressure on retail prices, sales and gross margins. Management’s initiatives included Everyday Lower Prices, Lowest Price Guarantee, loyalty promotions and gas rewards.
- Labor, benefits, healthcare, utilities, fuel, regulatory compliance and food-safety costs could materially affect profitability. The Company estimated an additional $928,000 of costs associated with increased full-time employment under the Affordable Care Act.
- The Company is substantially self-insured. It retains workers’ compensation exposure up to $2 million per claim and maintains property and casualty deductibles or retentions ranging from $100,000 to $1 million. Multiple material claims could adversely affect earnings.
- The Company discovered errors in its self-insurance reserve calculations, restated prior-period amounts and reported that the errors reduced 2014 net income by $786,000 and increased 2013 net income by $1.5 million. A previously reported material weakness was remediated by year-end through actuarial assistance and enhanced management review controls. The auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
- Operating lease commitments totaled $193.9 million, including $32.2 million due within one year. The Company also disclosed that future lease accounting adoption will require recognition of operating lease assets and liabilities.
- The investment portfolio is exposed to interest-rate, credit, liquidity and equity-market risk. Year-end marketable securities had $8.2 million of gross unrealized gains and $66,000 of gross unrealized losses.
- Routine litigation and tax contingencies were disclosed, but management did not expect them to have a material adverse effect. Unrecognized tax benefits were $1.3 million at year-end.
Most important facts to verify
- Confirm the sustainability of sales and comparable-store growth after the 2015 benefit from grocery mix and lower fuel prices.
- Assess whether wage increases, management incentives, healthcare costs and other labor pressures can be absorbed without further margin erosion.
- Review the $100 million 2016 capital plan against operating cash flow, investment reserves and available credit facilities.
- Monitor self-insurance reserve estimates and the effectiveness of the controls remediated during 2015.
- Evaluate marketable-securities concentration and potential valuation or liquidity effects from interest-rate and market changes.
- Consider the impact of $193.9 million of operating lease commitments and the eventual adoption of on-balance-sheet lease accounting.
- Review the controlled-company structure, including the Weis family’s approximately 65% voting control and related governance implications.