Business context and reporting period
Ingles Markets, Inc. operates supermarkets in the southeastern United States, with fluid dairy processing and shopping-center rental activities. This unaudited Form 10-Q covers the 13 weeks and 39 weeks ended June 27, 2015, compared with the periods ended June 28, 2014. The company operated 201 supermarkets at quarter-end.
Financial performance and position
| Metric | Three months ended June 27, 2015 | Three months ended June 28, 2014 | Nine months ended June 27, 2015 | Nine months ended June 28, 2014 |
|---|---|---|---|---|
| Net sales | $946.0 million | $978.3 million | $2,825.8 million | $2,871.1 million |
| Gross profit / margin | $222.2 million / 23.5% | $215.2 million / 22.0% | $665.2 million / 23.5% | $624.8 million / 21.8% |
| Operating income / margin | $31.1 million / 3.3% | $33.4 million / 3.4% | $102.3 million / 3.6% | $87.4 million / 3.0% |
| Net income / net margin | $13.8 million / 1.5% | $13.8 million / 1.4% | $43.1 million / 1.5% | $33.8 million / 1.2% |
| Class A diluted EPS | $0.68 | $0.61 | $2.13 | $1.49 |
Quarterly interest expense was $10.6 million, down from $11.6 million; nine-month interest expense was $34.2 million, down from $35.0 million. Nine-month operating cash flow was $101.2 million, versus $74.0 million; capital expenditures were $73.5 million, and investing cash outflow was $72.3 million. Financing cash outflow was $28.8 million. Cash increased $0.03 million during the nine months to $8.6 million.
At June 27, 2015, total assets were $1.666 billion, current assets $429.8 million and current liabilities $237.4 million. Carrying-value debt was $918.2 million, including $14.0 million current debt; stockholders’ equity was $416.0 million. The $175 million revolving credit facility had $21.3 million drawn and $11.0 million of letters of credit outstanding. The company reported compliance with its financial covenants.
Material changes versus prior comparable periods
- Quarterly sales fell 3.3%, principally reflecting lower gasoline prices: gasoline sales dollars decreased 23.9% as average price per gallon fell 31.4%, despite an 11.0% increase in gallons sold. Excluding gasoline, comparable grocery sales rose 1.6%; customer transactions increased 0.3% and average transaction size increased 1.5%.
- Quarterly gross profit rose 3.3%, while operating and administrative expenses increased 4.4% to $190.7 million. Higher non-gasoline gross margins and a lower effective tax rate largely offset weaker gasoline gross profit, higher costs and lower asset-sale results; quarterly net income was essentially unchanged.
- Nine-month sales declined 1.6%, but sales excluding gasoline increased 1.7% and comparable sales excluding gasoline increased 1.7%. Lower gasoline revenue was more than offset in earnings by higher gross profit and margins; nine-month net income increased 27.5%.
- Operating expenses rose 4.6% for the nine months, with management citing higher wages, self-insurance claims, depreciation and store supplies. Employee insurance expense was $26.0 million, up from $20.0 million.
- Total debt was lower than the $937.3 million reported at September 27, 2014, but management stated it was $918.2 million in June 2015 versus $909.3 million in June 2014.
Outlook, risks and unusual items
- Fiscal 2015 capital expenditures were expected to total approximately $100–$120 million; $73.5 million had been spent through June 27. The company expects net annual capital expenditures of approximately $100–$150 million going forward. A new store was expected to open later in fiscal 2015.
- Management expects cash from operations, the credit line and financing to support planned investment and working capital for the foreseeable future, while noting that financing may not be available when needed or on acceptable terms. Sales growth depends in part on economic conditions, inflation, gasoline prices and raw milk prices.
- The company expects to continue quarterly dividends, subject to board discretion and debt-agreement restrictions. Quarterly dividends were $0.165 per Class A share and $0.150 per Class B share.
- Key risks cited include competition, regional economic conditions, gasoline-price changes, labor and utility costs, adverse weather affecting food production and delivery, execution of store expansion and remodeling, and financing availability. Debt agreements contain cross-default and covenant provisions that could permit acceleration or termination of credit; the company reported covenant compliance.
- Self-insurance liabilities totaled $35.7 million, including $14.4 million current; estimates depend on claims and incurred-but-not-reported losses. The quarter included a $0.3 million loss on sale or disposal of assets, including a store property being demolished for replacement; the prior-year quarter included a $0.9 million gain. No asset impairments were recorded in the nine-month period.
- Management stated disclosure controls were effective as of June 27, 2015. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether grocery sales and comparable-store growth excluding gasoline continue, and how fuel prices and volumes affect reported revenue and profit.
- Whether improved gross margins persist as operating expenses, particularly labor and self-insurance costs, continue to rise.
- Capital spending, store openings and remodel returns against the stated investment plans and available cash flow.
- Debt levels, interest costs, covenant headroom and access to financing; the filing estimates capacity for approximately $371 million of additional borrowing under the most restrictive covenant.
- Self-insurance liability estimates, claims experience and any developments in tax positions or other contingencies.