Village Super Market, Inc. — Q3 Fiscal 2020 Form 10-Q
Reporting period: Third quarter (13 weeks) and year to date (39 weeks) ended April 25, 2020; comparisons are to the periods ended April 27, 2019. Amounts below are in millions unless stated otherwise. The company operates ShopRite and Gourmet Garage supermarkets and is a major member of Wakefern, its principal supplier.
Financial performance
| Metric | 13 weeks ended Apr. 25, 2020 | 13 weeks ended Apr. 27, 2019 | 39 weeks ended Apr. 25, 2020 | 39 weeks ended Apr. 27, 2019 |
|---|---|---|---|---|
| Sales | $458.3 | $395.5 | $1,303.1 | $1,225.1 |
| Gross profit / margin | $129.9 / 28.34% | $110.6 / 27.97% | $361.4 / 27.73% | $340.5 / 27.79% |
| Operating income / margin | $15.2 / 3.32% | $6.7 / 1.70% | $20.6 / 1.58% | $26.3 / 2.16% |
| Net income / margin | $11.2 / 2.43% | $5.0 / 1.26% | $15.7 / 1.21% | $18.8 / 1.55% |
| Diluted EPS, Class A | $0.77 | $0.34 | $1.09 | $1.31 |
- Quarterly change: Sales rose 15.9%, including 13.6% same-store sales growth, driven principally by COVID-19-related demand and stay-at-home measures, as well as store changes and digital growth. Digital sales increased 41.8%. Net income more than doubled year over year.
- Year-to-date change: Sales grew 6.4%, with same-store sales up 4.5%; digital sales increased 28.1%. Net income fell 16.4%. Excluding the unusual items identified by management for both periods, management said quarterly net income increased 97%, while year-to-date net income decreased 8%.
- Cash flow, 39 weeks: Operating cash flow was $59.4 million, versus $39.8 million; capital expenditures were $47.8 million, versus $18.8 million. Investing activities used $56.3 million, including a $7.6 million Fairway acquisition escrow deposit. Dividends used $9.7 million. Cash declined $11.5 million to $89.6 million.
Financial position and liquidity
- At April 25, 2020, cash was $89.6 million, current assets $145.6 million, current liabilities $124.5 million, and working capital $21.1 million; the current ratio was 1.17, down from 1.50 at July 27, 2019.
- Reported long-term debt was $125.4 million, including $95.4 million of operating lease obligations and $23.2 million of finance lease obligations. Lease accounting was adopted in fiscal 2020, so balance-sheet comparisons with July 2019 are not directly comparable. Cash and cash equivalents include $60.8 million deposited at Wakefern.
- Cash from operations benefited from working-capital movements, particularly lower inventories and increased payables to Wakefern. Management stated cash on hand, operating cash flow, and the credit facility should meet foreseeable requirements.
Material developments, outlook, and risks
- COVID-19: The company remained open as an essential retailer. It reported more than $5.5 million in incremental operating costs in the quarter for associate pay premiums, safety, sanitation, and other response measures. Supply constraints, labor availability, operating costs, and demand remain uncertain and could materially affect results and cash flows.
- Fairway acquisition: On May 14, 2020, after quarter-end, Village acquired five supermarkets, a production distribution center, and intellectual property for $73.2 million, net of specified adjustments, and assumed certain liabilities, mainly lease-related. The purchase was funded through the new credit facility and term loan. Integration, performance, expense, and synergy risks are identified.
- Credit facility: A May 6, 2020 agreement provides up to $125 million of revolving credit and a $25.5 million term loan. Village executed the term note on May 12; it also expects to convert approximately $50 million of revolver capacity into a secured term loan, subject to closing conditions. The facility includes financial covenants.
- Guidance: No fiscal 2020 same-store sales guidance was provided because of COVID-19 uncertainty. Fiscal 2020 capital expenditures were budgeted at $55 million. Management expected an effective tax rate of 29.5%–30.5% and pension contributions to be immaterial; the board intended to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share.
- Unusual items: Quarterly results included an $854,000 after-tax gain from selling pharmacy prescription lists and lower pension settlement charges than the prior-year quarter. Year-to-date results also included pension, store pre-opening and closure charges; prior-year results included a Superstorm Sandy insurance recovery. A further $2.266 million Sandy recovery received in May is expected to reduce operating and administrative expense in Q4.
- Other stated risks include intense competition and narrow margins, dependence on Wakefern, collective bargaining coverage for approximately 88% of employees, pension-plan exposure, food safety, cybersecurity, and the uncertain economic effects of COVID-19. Management said ordinary-course litigation was not expected to materially harm the company.
Investor facts to verify
- Whether pandemic-era sales growth and margins persist as restrictions, customer behavior, product availability, and incremental response costs change.
- Fairway’s acquisition accounting, integration costs, operating performance, and the resulting borrowing, lease, and covenant position.
- Working-capital and operating-cash-flow sustainability, planned capital spending, and capacity to maintain dividends while servicing debt and lease obligations.
- The scale and timing of any continuing supply, labor, pension, competitive, or Wakefern-related risks.