Village Super Market, Inc. — Q3 FY2017 Form 10-Q
Reporting period: 13 and 39 weeks ended April 29, 2017; comparable periods ended April 23, 2016. Amounts are in thousands, except per-share data and percentages. Village operates 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania and relies substantially on Wakefern as its principal supplier.
Financial results
| Metric | 13 weeks ended Apr. 29, 2017 | 13 weeks ended Apr. 23, 2016 | 39 weeks ended Apr. 29, 2017 | 39 weeks ended Apr. 23, 2016 |
|---|---|---|---|---|
| Sales | $391,984 | $387,905 | $1,193,891 | $1,197,603 |
| Gross profit / margin | $108,336 / 27.64% | $106,738 / 27.52% | $324,223 / 27.16% | $324,950 / 27.13% |
| Operating income / margin | $10,738 / 2.73% | $10,065 / 2.61% | $28,805 / 2.41% | $29,678 / 2.48% |
| Net income / margin | $6,015 / 1.53% | $5,882 / 1.53% | $16,117 / 1.34% | $16,596 / 1.39% |
| Class A basic / diluted EPS | $0.47 / $0.42 | $0.47 / $0.42 | $1.27 / $1.13 | $1.31 / $1.17 |
Cash flow: Operating cash flow for the first 39 weeks was $26,262, down from $46,681. Capital expenditures were $19,755; dividends paid were $9,562; and net cash used in financing activities was $12,918. Cash and cash equivalents declined by $7,827 during the period, to $80,552.
Balance sheet and liquidity at April 29, 2017: Total assets were $445,021 and shareholders’ equity was $278,593. Working capital was $85,198, with a 1.97 current ratio. Cash included $55,209 of demand deposits at Wakefern. Notes receivable from Wakefern totaled $44,151, including $21,884 classified as current and due August 15, 2017. Long-term debt was $42,895; current capital and financing lease obligations were $609 and current notes payable to Wakefern were $292. The company had no borrowings outstanding on its $25,000 revolving credit facility.
Material changes and management commentary
- Third-quarter sales increased 1.1%, with same-store sales up 1.1%; excluding the prior-year comparison impact of Winter Storm Jonas, same-store sales rose 0.4%. Management cited competitor store closings and growth at remodeled or expanded stores, partly offset by competitor openings and deflation in meat, produce and dairy.
- For the first nine months, sales declined 0.3% and same-store sales declined 0.3%. Gross margin improved slightly in both the quarter and year-to-date period. Operating margin improved in the quarter but declined year to date.
- Reported third-quarter net income included a $465 after-tax, non-recurring credit related to multi-employer health and welfare benefits. The prior-year quarter included a $545 after-tax gain from Superstorm Sandy insurance recoveries. Excluding these items, management said quarterly net income increased 4%; for the nine-month period, it decreased 2%, primarily due to lower same-store sales.
- Management attributed the nine-month operating cash flow decrease primarily to working-capital changes, including the timing of income-tax payments and changes in inventories. Working-capital changes reduced fiscal 2017 cash flow by $11,800, compared with an increase of $10,517 in the prior-year period.
- Total assets declined from $450,254 at July 30, 2016, while working capital increased largely because $21,884 of Wakefern notes receivable became current. The company invested an additional $626 in Wakefern common stock. A pension plan covering Stroudsburg union employees was frozen effective January 31, 2017; a $629 pre-tax remeasurement gain was recorded in other comprehensive income, not earnings.
Outlook, risks and contingencies
- Fiscal 2017 same-store sales are expected to range from a 1.0% decrease to flat. The company budgeted approximately $25,000 in capital expenditures, including the start of a new Bronx store, a major remodel, smaller remodels and energy-efficiency projects.
- The Board’s current intention is to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management expects operating cash flow and other liquidity sources to cover anticipated working capital, capital spending and debt payments for the foreseeable future.
- Management expected a 41.0%–42.0% fiscal 2017 effective tax rate, approximately $400 of net periodic pension costs, and $3,000 of pension contributions. It also cautioned that medical and other fringe benefit costs may rise.
- Principal disclosed risks include intense competition and narrow grocery margins; regional concentration; dependence on Wakefern for merchandise, services and patronage dividends; collective bargaining and employee benefit costs; food safety; underfunded multi-employer pension plans; asset impairment; tax uncertainty; and information-system interruptions or cybersecurity breaches.
- Management stated that routine litigation was not expected to materially adversely affect financial position, results or liquidity. No substantial changes to previously reported contractual obligations were noted. The company was assessing the effects of recently issued revenue recognition, lease and share-based payment accounting standards.
Important facts for investors to verify
- Whether same-store sales meet the full-year outlook, particularly given deflation and competitor openings.
- Progress and spending against the $25,000 capital budget, including the planned Bronx store and remodels.
- Cash generation and working-capital trends; nine-month operating cash flow was materially below the prior year.
- Wakefern exposure: notes receivable, deposits, supplier dependence, and the timing or terms of repayment.
- Actual pension contributions, multi-employer plan obligations, and employee benefit cost developments.
- Dividend and share-repurchase activity: the company reported 111,688 shares purchased during the quarter, including 82,214 shares surrendered for employee tax withholding.