Village Super Market, Inc. — Q2 FY2020 Form 10-Q
Business context and reporting period. The unaudited quarter covered 13 weeks ended January 25, 2020; year-to-date figures cover 26 weeks. Village operated 30 ShopRite supermarkets and three Gourmet Garage specialty markets. It is a major Wakefern member and purchases substantially all merchandise through Wakefern. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Quarter | 26 weeks |
|---|---|---|
| Sales | $437.4, up 2.2% | $844.8, up 1.8% |
| Gross profit / margin | $117.9 / 27.0%, versus 27.5% | $231.5 / 27.4%, versus 27.7% |
| Operating income / margin | $2.4 / 0.55%, versus $10.7 / 2.50% | $5.4 / 0.64%, versus $19.6 / 2.36% |
| Net income | $2.0, versus $7.6 | $4.6, versus $13.8 |
| Class A diluted EPS | $0.14, versus $0.53 | $0.32, versus $0.96 |
Same-store sales rose 0.1% in both periods. Sales growth reflected the Stroudsburg replacement store, Gourmet Garage and same-store growth; those contributions were partly offset by competitor openings and other factors. Gross margin declined as price investments, lower departmental margins and reduced Wakefern patronage dividends and rebates weighed on results. Operating and administrative expenses also rose.
- Cash flow: Year-to-date operating cash flow was $27.8, down from $35.9. Capital expenditures were $38.1, compared with $13.6; investing cash outflow totaled $46.5. Dividends paid were $6.4. Cash decreased $25.7 to $75.4.
- Liquidity: Working capital was $23.3 versus $56.3 at July 27, 2019; the current ratio fell to 1.19 from 1.50. The company had a $25.0 unsecured revolver with no borrowings outstanding. Management said cash, operating cash flow and other liquidity sources should meet foreseeable needs.
- Debt and leases: Adoption of lease accounting added operating lease assets and liabilities to the balance sheet. At January 25, present-value lease liabilities were $110.2 operating and $23.9 finance. Long-term debt reported was $128.3, including these lease obligations, Wakefern notes and New Markets Tax Credit notes; the filing does not present a separate conventional-borrowing total. The company also held $51.8 of notes receivable from Wakefern.
- Other balance-sheet items: Total assets were $586.8 and shareholders’ equity $322.0. Cash included $51.1 in Wakefern demand deposits.
Material changes and unusual items
- Reported net income fell substantially year over year. Management said net income excluding specified items declined 53% for the quarter and 49% year to date, primarily because of lower gross margins and higher operating expenses.
- Current-year results included net-of-tax pension settlement charges of $0.9, Stroudsburg replacement-store pre-opening costs of $0.3 for the quarter and $0.9 year to date, and old-store closure and lease write-off costs of $0.4 for the quarter and $0.6 year to date. Prior-year year-to-date results included a $0.3 net-of-tax Superstorm Sandy insurance recovery gain.
- Adoption of the new lease standard in fiscal 2020 increased recognized assets and liabilities and changed expense classification; comparative periods were not restated. It also reduced opening retained earnings by $3.5, net of tax.
- Village entered a stalking-horse agreement to buy up to five Fairway supermarkets, a production distribution center and related intellectual property for $68.6, subject to adjustments and assumed liabilities. The bankruptcy-court bidding process could result in a higher bid; Village was not certain it would complete the deal. It had deposited $6.9 in escrow and expected to fund any purchase using cash, its revolver and other debt. If it lost the bid, it would be entitled to a 3% break-up fee.
Outlook, commentary and risks
- Management expected fiscal 2020 same-store sales to range from a 0.5% decline to a 1.0% increase, with continued gross-margin pressure from price investments, including ShopRite’s Right Price Promise strategy.
- Fiscal 2020 capital expenditure budget was $55.0, including the Stroudsburg replacement store, three major remodels, ShopRite from Home expansion and other upgrades. The Board’s stated intention was to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share.
- Management forecast an effective tax rate of 29.5%–30.5%, approximately $1.8 of net periodic pension costs, and immaterial fiscal 2020 defined-benefit pension contributions.
- Key risks include intense competition and narrow margins; dependence on Wakefern; labor and collective-bargaining costs (about 88% of employees were covered by agreements); underfunded multi-employer pension plans; food safety; self-insured claims; and impairment, tax, and cybersecurity risks. The filing also warned that COVID-19 could cause regional quarantines, labor shortages, supply-chain disruption and economic instability, with regional impact uncertain at the time.
- Superstorm Sandy insurance litigation remained ongoing; Village had received $4.0 in recoveries, and any further proceeds would be recognized when received. Management did not expect other ordinary-course litigation to materially adversely affect the company.
Important facts for investors to verify
- Whether gross-margin declines and higher labor, occupancy and other operating costs persist, and whether the stated same-store sales outlook is achieved.
- Actual fiscal 2020 capital spending, cash generation, dividend payments and liquidity after planned expenditures.
- Outcome, final scope, assumed lease liabilities and financing terms of the Fairway bankruptcy auction and proposed acquisition.
- Full effect of lease obligations and other debt on fixed-charge coverage and financial flexibility.
- Any realized operational or financial effects from COVID-19, Wakefern-related exposure, pension funding, or pending insurance and legal matters.