Business context and reporting period
Ingles Markets, Inc. operates 197 supermarkets in the southeastern United States, with fuel centers, pharmacies, fluid dairy operations and shopping-center rentals. This unaudited Form 10-Q covers the three and nine months ended June 27, 2020, compared with periods ended June 29, 2019. The company attributed stronger grocery demand to COVID-19-related stay-at-home measures and closures of schools and restaurants.
Financial performance
| Metric | Three months ended June 27, 2020 | Nine months ended June 27, 2020 |
|---|---|---|
| Net sales | $1.190 billion, up 12.0% | $3.413 billion, up 9.2% |
| Gross profit / margin | $324.7 million / 27.3% (24.4% prior year) | $873.8 million / 25.6% (24.4% prior year) |
| Operating income / margin | $91.5 million / 7.7% (4.1% prior year) | $193.2 million / 5.6% (3.6% prior year) |
| Net income / net margin | $62.8 million / 5.3% (versus $23.5 million / 2.2%) | $120.7 million / 3.5% (versus $60.7 million / 1.9%) |
| Class A diluted EPS | $3.10 (versus $1.16) | $5.96 (versus $2.99) |
Quarterly interest expense was $9.7 million, down from $11.7 million; nine-month interest expense was $31.8 million, down from $35.9 million. Nine-month results included a $3.7 million loss on early debt extinguishment. Nine-month cash from operations was $229.0 million, compared with $144.5 million; capital expenditures were $78.9 million, compared with $123.2 million. Cash increased by $110.0 million to $152.1 million.
Balance sheet and liquidity
At June 27, 2020, total debt was approximately $819.3 million, including $168.9 million classified as current; long-term debt was $650.3 million. The company had no borrowings under its $175 million revolving credit facility, with $9.5 million of letters of credit issued. Current assets were $596.2 million and current liabilities $428.0 million. Stockholders’ equity was $764.2 million. Operating lease liabilities totaled $48.7 million following adoption of the new lease accounting standard.
Material changes and management commentary
- Comparable grocery sales excluding gasoline increased 23.1% in the quarter and 14.4% year to date. Excluding gasoline, customer transactions fell 10.3% in the quarter while average transaction size rose 26.6%; management attributed this to customers consolidating trips.
- Gasoline sales dollars and gallons sold declined amid lower pandemic-related demand and oversupply. Less promotional discounting helped lift retail gross margins.
- Operating and administrative expenses rose in dollars but declined as a share of sales, reflecting sales growth outpacing expenses. Higher labor, insurance, advertising and cleaning-related costs partly offset that leverage.
- The company refinanced $155 million of senior notes with a ten-year amortizing real estate loan in December 2019. It redeemed another $150 million of notes on July 9, 2020, and announced a further $100 million redemption for August 27, 2020. After the latter redemption, $295 million of the notes was expected to remain; the company anticipated approximately $2.0 million and $1.4 million of related extinguishment costs, respectively.
Outlook, risks and contingencies
Management expects fiscal 2020 capital expenditures of approximately $100 million to $120 million and indicated it did not then expect the pandemic to adversely affect those plans. Longer-term annual capital expenditures were expected to be approximately $100 million to $160 million. The company expects to continue regular quarterly dividends, subject to board discretion, results, financial condition and debt restrictions. Management said available cash, operating cash flow and financing should meet foreseeable needs, but financing may not be available on acceptable terms.
Management cautioned that future sales depend partly on the duration of pandemic restrictions. Risks include changing consumer demand and confidence, labor availability and costs, supply-chain disruptions, competition, gasoline price and volume changes, and tenant impacts; the company had offered rent deferrals to shopping-center tenants. Self-insurance reserves were $33.5 million. Pending ordinary-course legal claims were not expected by management to have a material effect. The company was in compliance with financial covenants at quarter-end. A related party transaction involved a November 2019 sale of two land parcels for $4.3 million to an entity in which the board chairman had a financial interest; independent appraisals were obtained and the audit committee approved it.
Important facts for investors to verify
- Whether pandemic-driven grocery demand and unusually favorable margins persist as schools, restaurants and businesses reopen.
- The effects of the July and August 2020 note redemptions, including final extinguishment costs, debt balances, interest expense and liquidity.
- Actual capital spending versus the stated fiscal 2020 plan, and progress on planned store projects.
- Changes in self-insurance reserves, vendor allowances and shopping-center tenant collections or rent deferrals.
- Debt covenant headroom, dividend restrictions and exposure to floating rates and interest-rate swaps.