Ingles Markets, Inc. — Q2 FY2017 Form 10-Q
Business context and period. The filing covers the 13 weeks and six months ended March 25, 2017; comparatives are the periods ended March 26, 2016. Ingles operated 201 supermarkets across six Southeastern states, alongside a fluid dairy business and shopping-center rentals.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net sales | $946.2 million | $924.3 million | $1,928.9 million | $1,875.4 million |
| Gross profit / margin | $228.1 million / 24.1% | $228.7 million / 24.7% | $465.2 million / 24.1% | $454.4 million / 24.2% |
| Operating income / margin | $25.1 million / 2.6% | $33.1 million / 3.6% | $57.2 million / 3.0% | $64.8 million / 3.5% |
| Net income / margin | $9.2 million / 1.0% | $14.4 million / 1.6% | $23.0 million / 1.2% | $27.3 million / 1.5% |
- Q2 sales rose 2.4%, while net income fell 36%; first-half sales rose 2.9%, while net income fell 16%. Class A diluted EPS was $0.45 for Q2 and $1.13 for the first half, versus $0.71 and $1.35, respectively, a year earlier.
- Operating and administrative expenses rose 3.5% in Q2 and 4.9% in the first half, outpacing sales growth. They increased to 21.5% of sales for Q2 and 21.2% for the half-year, from 21.2% and 20.8%.
- Cash from operations was $65.5 million for the first half, versus $57.6 million. Capital expenditures were $59.4 million, and cash used in investing activities was $57.9 million. Ending cash was $6.1 million.
- At March 25, 2017, total debt was $876.5 million, including $866.4 million long-term debt and $10.1 million current debt; management reported debt was $31.2 million lower than in March 2016. Total assets were $1.70 billion and stockholders’ equity was $486.7 million. Current assets of $430.4 million exceeded current liabilities of $240.2 million.
- The company paid first-half dividends of $0.33 per Class A share and $0.30 per Class B share, unchanged from the prior-year period.
Material changes and management commentary
- Management attributed Q2 weakness partly to Easter timing: Easter fell in March in 2016, benefiting that year’s second quarter, and in April in 2017. Management said the 2017 third quarter would receive the holiday-related benefit.
- Excluding gasoline and the prior-year Easter effect, Q2 comparable grocery sales decreased 0.3%; first-half comparable grocery sales increased 0.8%. Q2 customer transactions excluding gasoline rose 0.2%, while average transaction size fell 0.8%.
- Gasoline sales dollars increased 28.3% in Q2, reflecting a 25.5% higher average price per gallon and 2.3% more gallons sold. For the first half, gasoline sales were $236.6 million versus $200.7 million.
- Personnel costs were a major expense driver; management cited added labor hours for in-store merchandising changes and increased competition for labor. Q2 interest expense also rose, which management attributed to higher line-of-credit borrowing for inventory, taxes, and capital expenditures.
- Management reported no asset impairments during the first half. Vendor allowances reduced merchandise costs by $59.7 million and advertising expense by $7.1 million for the half-year; management noted that a substantial reduction in vendor advertising allowances could affect advertising choices and costs.
Outlook, liquidity, and risks
- Fiscal 2017 capital expenditures were projected at approximately $100 million to $140 million. Management expected ongoing annual net capital expenditures of approximately $100 million to $160 million to maintain and modernize stores. Construction commitments at quarter-end were $8.9 million.
- The company expected to continue regular quarterly dividends, subject to board discretion and debt-agreement restrictions. Management believed operating cash flow, the credit line, and financing would cover planned capital expenditures and working-capital needs, while cautioning that financing may not be available on acceptable terms.
- The $175 million line of credit matures in June 2018; $7.2 million was drawn at quarter-end, and $9.0 million of unused letters of credit had been issued. The company reported compliance with debt covenants and approximately $360 million of additional borrowing capacity under its most restrictive covenant.
- Debt agreements include cross-default and other provisions that can permit acceleration or termination of credit. Senior notes of $700 million bear 5.75% interest and are due 2023. The facility bonds have a final maturity in 2036 and mandatory annual redemptions.
- Key risks cited include competition and pricing pressure, economic conditions, gasoline prices, labor and utility costs, weather affecting food supply and delivery, financing availability, and execution and performance of new, expanded, remodeled, or replacement stores. Results are seasonal; the second fiscal quarter is traditionally the lowest-sales quarter.
- Self-insurance reserves totaled $35.9 million, including $13.5 million current and $22.4 million long-term liabilities; estimates depend on claims experience and incurred-but-not-reported claims.
Important facts for investors to verify
- Whether the post-Easter quarter delivered the expected sales benefit, and how comparable sales perform excluding gasoline and calendar effects.
- Whether cost growth—especially wages and other operating expenses—moderates enough to stabilize operating and net margins.
- Progress and returns on the planned capital program, alongside operating cash generation and debt reduction.
- Credit-line renewal or replacement before its June 2018 maturity, covenant headroom, and exposure to variable-rate borrowing.
- Assumptions and potential changes in self-insurance reserves and vendor allowances.