Business context and reporting period
Ingles Markets, Inc. operates 198 supermarkets in six southeastern states, alongside fuel, dairy and shopping-center rental operations. This unaudited Form 10-Q covers the 13-week second quarter and 26-week first half of fiscal 2023, ended March 25, 2023; comparisons are to periods ended March 26, 2022.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Net sales | $1,380.6 million | $1,377.1 million | $2,873.9 million | $2,768.6 million |
| Gross profit / margin | $325.9 million / 23.6% | $348.6 million / 25.3% | $697.1 million / 24.3% | $699.1 million / 25.3% |
| Operating income / margin | $57.6 million / 4.2% | $95.1 million / 6.9% | $153.4 million / 5.3% | $185.5 million / 6.7% |
| Net income | $40.5 million | $68.6 million | $109.9 million | $134.8 million |
| Class A diluted EPS | $2.13 | $3.61 | $5.79 | $7.10 |
Q2 sales were nearly flat year over year, while first-half sales increased 3.8%. Excluding fuel, comparable grocery sales increased 3.4% for the quarter and 4.67% for the first half. Q2 fuel revenue declined to $175.6 million from $200.2 million; grocery and non-foods revenue increased, while perishables revenue decreased.
Operating and administrative expenses rose 5.6% in Q2 and 5.9% in the first half. First-half interest expense was $10.7 million, slightly below $10.8 million a year earlier. Dividends remained $0.165 per Class A share and $0.15 per Class B share per quarter.
Cash flow, balance sheet and debt
- First-half operating cash flow was $94.4 million, down from $155.5 million. The company attributed the decline to lower earnings and increased working-capital needs.
- Capital expenditures were $91.4 million; investing cash outflow was $89.6 million. Financing cash outflow was $21.7 million, including $15.6 million of debt principal payments and $6.1 million of dividends. Cash decreased $16.9 million to $250.3 million.
- At March 25, 2023, current assets were $853.7 million and current liabilities were $292.5 million. Total assets were $2.34 billion and stockholders’ equity was $1.36 billion.
- Total debt was approximately $556.7 million, versus $578.5 million at March 2022; the balance sheet reports $17.5 million current and $539.2 million long-term debt. No borrowings were outstanding under the $150 million credit line, which matures in June 2026. The company reported covenant compliance.
- Interest-rate swaps had aggregate notional value of $156.0 million. Their fair-value changes resulted in $3.2 million of first-half after-tax other comprehensive loss. The company reported $12.2 million of swap assets at quarter-end.
Changes, outlook and risks
Profitability weakened despite higher first-half sales. Management attributed the decline chiefly to inflation and supply-chain pressures on product costs, along with labor-market competition and higher associate retention costs. Gross margin fell 1.7 percentage points in Q2 and 1.0 point in the first half. Q2 operating expenses increased by $14.2 million, including higher wages, taxes and licenses, and repairs and maintenance.
The company expects fiscal 2023 capital expenditures of approximately $140 million to $180 million, primarily for store improvements, one planned store opening, technology, equipment and milk-processing-plant improvements. It expects annual capital expenditures of approximately $100 million to $160 million thereafter. Management believes available cash, operating cash flow and financing resources should meet foreseeable needs, but notes financing may not be available on acceptable terms. It expects to continue regular quarterly dividends, subject to board discretion and debt restrictions; no earnings guidance was provided.
Management identified ongoing risks from food and labor inflation, supply-chain disruption, tight labor availability, competition, fuel-price changes, economic conditions, weather affecting food production and distribution, and financing availability. The company stated that pandemic effects had eased but uncertainty remained. It reported no asset impairments in the first half and said pending ordinary-course legal matters were not expected to materially affect results. Self-insurance reserves were $31.1 million, including expected recoveries. Debt agreements include cross-default provisions and dividend restrictions; the company also noted LIBOR-based debt and swaps have not yet transitioned away from LIBOR.
Important facts for investors to verify
- Whether weaker margins and earnings persist as product costs, wages and other operating expenses change.
- How working-capital needs and planned capital spending affect operating cash flow, cash balances and debt reduction.
- Progress and terms of transition from LIBOR for applicable debt and swap arrangements, and related interest-rate exposure.
- Compliance with debt covenants, borrowing availability and restrictions on future dividends.
- Assumptions underlying self-insurance reserves and expected recoveries, as well as the status of legal contingencies.