WMK

Business Context and Reporting Period

Company: Weis Markets, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13 weeks and 39 weeks ended September 26, 2009.
Operations: The company operates 165 retail food stores in Pennsylvania and four surrounding states (Maryland, New Jersey, West Virginia, and New York), along with 25 Superpetz pet supply stores. On August 23, 2009, the company acquired eleven Giant Markets stores in Broome County, New York, to expand its presence in the Southern Tier.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3.2% in the third quarter and 2.3% year-to-date compared to 2008. Comparable store sales increased 1.1% in the quarter and 1.7% year-to-date.
• Profitability Surge: Net income increased 92.2% in the third quarter and 57.7% year-to-date. Operating income rose 123.2% in the quarter and 72.8% year-to-date.
• Acquisition Impact: The acquisition of eleven Giant Markets stores contributed $16.2 million to third-quarter sales. The cash purchase price was $35.8 million, resulting in $19.4 million of recorded goodwill.
• Cost Management: Gross profit margins improved to 27.5% in the quarter (from 25.9% in 2008) and 27.1% year-to-date (from 25.9%). This was driven by a 42.3% decrease in diesel fuel costs for the quarter and improved inventory shrinkage controls.
• Expense Control: Operating, general, and administrative (OG&A) expenses increased only 1.0% in the quarter and 0.7% year-to-date, while declining as a percentage of sales.

Guidance, Outlook, and Risks

• Capital Expenditures: Management estimates total investment for 2009 will be approximately $80.5 million, including the Giant Markets acquisition. Funding is expected to come from internally generated cash flows.
• Dividends: The Board approved a quarterly dividend of $0.29 per share, payable November 16, 2009. Total dividends paid for the first three quarters were $0.87 per share.
• Market Risks:
  • Fuel Prices: While fuel costs have dropped significantly, management notes that fluctuating prices could adversely affect delivered product costs and petroleum-based supplies.
  • Competition: Competitors with greater financial resources may take measures that could adversely affect Weis Markets' competitive position.
  • Pharmacy Sales: Prescription growth is offset by retail erosion due to generic penetration and mail-order shifts, though new pricing strategies have reversed previous downward trends.
  • Dairy Deflation: Significant product deflation in the dairy category (eggs and milk) is expected to continue, with management anticipating a 6.0% decline for the total year.
• Health Care Costs: Self-insured health care benefits decreased in the third quarter, but management expects a trend of increasing costs for the remainder of the year.

Investor Verification Checklist

• Acquisition Integration: Verify the performance of the newly acquired Giant Markets stores and the realization of expected synergies in the Southern Tier market.
• Fuel Price Sensitivity: Monitor diesel fuel price trends and their potential impact on distribution costs and gross margins in the coming quarters.
• Health Care Expense Trend: Track the trajectory of self-insured health care costs, as management anticipates an increase despite recent reductions.
• Capital Allocation: Confirm that the $80.5 million capital expansion plan is funded solely by operating cash flows without the need for external financing.
• Comparable Store Sales: Assess whether the 1.1% comparable store sales growth is sustainable given the challenging economic environment and competitive pressures.