Village Super Market, Inc. — Q1 FY2021 Form 10-Q
Reporting period: 13 weeks ended October 24, 2020; comparisons are with the 13 weeks ended October 26, 2019. Amounts below are in millions unless otherwise noted. Village operates ShopRite, Fairway Markets and Gourmet Garage supermarkets and is a major member of Wakefern, its principal supplier.
Financial performance
| Metric | Q1 FY2021 | Prior year | Change / context |
|---|---|---|---|
| Sales | $490.1 | $407.4 | Up 20.3%; same-store sales rose 6.6% and digital sales rose 172%. |
| Gross profit / margin | $138.0 / 28.15% | $113.5 / 27.87% | Margin up 0.28 percentage points; excluding Fairway, margin declined 0.39 points. |
| Operating income / margin | $4.9 / 1.00% | $3.0 / 0.73% | Reported operating income increased. |
| Net income / margin | $3.4 / 0.69% | $2.6 / 0.63% | Reported net income rose 30.9%; excluding prior-year Stroudsburg pre-opening and closure costs, net income was flat. |
| Operating cash flow | $(3.4) | $3.4 | Working-capital changes were the primary driver of the decline. |
| Capital expenditures | $3.3 | $22.3 | Q1 spending primarily included Fairway integration, self-checkout and equipment. |
Cash and cash equivalents were $99.6 million at October 24, 2020, down from $111.7 million at July 25, 2020. Working capital was $38.6 million, with a 1.25 current ratio, versus $34.5 million and 1.21 at fiscal year-end. Total debt excluding lease obligations was $79.2 million, compared with $80.6 million at July 25, 2020. Balance-sheet lease obligations totaled $334.5 million, including operating and finance leases.
Interest expense increased to $1.0 million from $0.6 million; interest income declined to $0.9 million from $1.3 million. Village paid $3.3 million in dividends during the quarter. It held $69.0 million of cash deposits at Wakefern and had $53.6 million in notes receivable from Wakefern.
Material changes and management commentary
- Sales growth reflected the Fairway acquisition, the Stroudsburg replacement store opened in November 2019, and higher same-store sales. COVID-19 drove higher demand at most stores, larger baskets and fewer transactions. Fairway and Gourmet Garage Manhattan locations were hurt by resident departures and reduced commuter and tourist traffic.
- Fairway, acquired in May 2020 for $73.6 million net of cash acquired, added five supermarkets, a production distribution center and intellectual property. Management cited integration costs and sales and operating profits below initial expectations, particularly in Manhattan.
- Gross margin benefited from Fairway’s higher margins, but excluding Fairway it was pressured by pricing investments under ShopRite’s Right Price Promise, lower departmental margins, reduced Wakefern patronage dividends and product mix. Lower promotional spending partly offset these effects.
- Operating and administrative expense was 25.37% of sales versus 25.32%. COVID-related wage, safety and sanitation costs, Fairway occupancy costs and digital-sales costs were partly offset by lower payroll and benefits. Interest expense rose primarily because of the new credit agreement.
- Operating cash flow turned negative as inventory rose and amounts payable to Wakefern declined while pandemic-era stock levels and inventory turnover normalized.
Debt, outlook and risks
Village’s Wells Fargo facility provides a $125 million revolving line, a $25.5 million unsecured term loan and the option to convert up to $50 million of the revolver into a secured term loan. Village converted $50 million in September 2020, reducing revolver availability to $75 million; no revolver balance remained at quarter-end. The facility also had $7.3 million of letters of credit outstanding. Interest-rate swaps hedge $73.7 million of notional debt; the company reported compliance with all facility covenants.
- Management expected fiscal 2021 same-store sales to be flat to slightly down, with first-half positive trends offset by second-half declines as pandemic effects recede. It expected lower gross margins excluding acquired stores because of continued pricing investment.
- Fiscal 2021 capital expenditures were budgeted at $35 million. The Board’s stated intention was to maintain quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share.
- Management expected an effective tax rate of 30%–31%, approximately $1.4 million of pension cost, and immaterial contributions to the company-sponsored defined-benefit plans. It believed cash, operating cash flow and the credit facility would meet foreseeable needs.
- Key uncertainties include the duration and effects of COVID-19, including demand volatility, labor and supply-chain disruption and higher costs; Fairway’s integration and performance; intense competition and narrow grocery margins; reliance on Wakefern; collective-bargaining and pension costs; food safety, insurance, impairment and cybersecurity risks. Management said ordinary-course litigation was not expected to materially adversely affect financial position, results or liquidity.
Most important facts for investors to verify
- Whether Fairway’s Manhattan sales and operating performance recover, and whether integration and production-center costs or anticipated synergies differ from expectations.
- Whether pandemic-related sales, digital demand, labor costs and working-capital needs develop as management’s outlook assumes.
- Whether the planned $35 million capital program and dividend intentions remain supportable by operating cash flow and available credit.
- Debt, lease obligations, interest-rate hedge coverage and covenant compliance, including the remaining revolver capacity and any changes in borrowing needs.
- Exposure to Wakefern as supplier, deposit holder and borrower, including the collectability and terms of the $53.6 million in notes receivable.