Village Super Market, Inc. — Q2 FY2016 Form 10-Q
Business and period. The company operates 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania and is a major Wakefern cooperative member. This unaudited filing covers the 13 and 26 weeks ended January 23, 2016; comparisons are to the periods ended January 24, 2015. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | 13 weeks ended Jan. 23, 2016 | 13 weeks ended Jan. 24, 2015 | 26 weeks ended Jan. 23, 2016 | 26 weeks ended Jan. 24, 2015 |
|---|---|---|---|---|
| Sales | $420.2 | $411.2 | $809.7 | $790.9 |
| Gross profit | $112.7 | $111.1 | $218.2 | $213.9 |
| Operating income | $11.4 | $12.7 | $19.6 | $20.6 |
| Net income | $6.3 | $6.6 | $10.7 | $10.5 |
| Diluted EPS, Class A | $0.44 | $0.47 | $0.76 | $0.74 |
| Diluted EPS, Class B | $0.32 | $0.34 | $0.55 | $0.54 |
| Gross margin | 26.83% | 27.03% | 26.95% | 27.05% |
| Operating margin | 2.73% | 3.09% | 2.42% | 2.60% |
| Net margin | 1.50% | 1.61% | 1.32% | 1.33% |
Cash flow and balance sheet. For the first half, operating cash flow was $38.7 million, versus $35.6 million a year earlier; capital expenditures were $10.6 million, dividends $6.3 million, and cash increased $20.7 million to $79.8 million. At January 23, 2016, working capital was $49.5 million and the current ratio was 1.5. Reported debt, including current and long-term lease obligations and Wakefern notes payable, totaled approximately $44.9 million. The company had no borrowings under its $25 million revolving credit facility, extended through December 31, 2017. Pension liabilities were $34.2 million.
Changes and drivers
- Quarterly sales and same-store sales rose 2.2%; first-half sales and same-store sales rose 2.4%. Excluding the sales boost from customers preparing for Winter Storm Jonas, same-store sales increased 0.8% for the quarter and 1.7% for the half-year.
- Quarterly operating income and net income declined despite higher sales. Management attributed pressure primarily to lower departmental gross margins and higher operating costs, including pension, healthcare and payroll expenses. Higher sales late in the quarter from Winter Storm Jonas partly offset the pressure.
- Gross margin fell 0.20 percentage points in the quarter and 0.10 points for the half-year. Operating expense as a share of sales rose 0.18 points and 0.10 points, respectively. Higher Wakefern warehouse assessments and departmental margin declines weighed on quarterly gross margin.
- Reported first-half net income increased from $10.5 million to $10.7 million, but management said it declined 15% excluding prior-year items: a Superstorm Sandy insurance-receivable write-off and accrued interest and penalties related to the New Jersey tax dispute. For the quarter, management reported an 11% normalized net-income decline after excluding prior-year tax-related interest and penalties.
Outlook, risks and unusual items
- Management expects fiscal 2016 same-store sales growth of 0.5%–1.5%, capital expenditures of approximately $20 million, and an effective tax rate of 41.5%–42.5%. The board’s current intention is quarterly dividends at the then-current rates of $0.25 per Class A share and $0.1625 per Class B share. No full-year earnings guidance is provided.
- The company expects operating costs to be affected by higher medical and other fringe-benefit expenses and says cash, operating cash flow and other liquidity sources should meet foreseeable needs.
- On February 15, 2016, the company amended its non-union employee and pharmacist pension plan to freeze benefits effective March 31, 2016, while increasing the employer match to its 401(k) plan. Management expects an immaterial third-quarter operating impact; plan remeasurement results were to be reported in the third quarter. Approximately $3 million of pension contributions were expected in fiscal 2016.
- After the quarter, the company received $0.94 million of additional Superstorm Sandy insurance proceeds, expected to reduce operating and administrative expenses in the third quarter. Further recoveries, if any, will be recognized when received. Other ordinary-course litigation was not expected by management to materially affect financial condition, results or liquidity.
- New Jersey tax assessments were settled in March 2015; the company paid $33 million, with an approximately $21 million net cash outflow after federal tax effects. Gross unrecognized tax benefits were $0.6 million at January 23, 2016.
- Key disclosed risks include intense price competition and narrow margins; weak sales trends at the two Maryland stores, which could lead to impairment charges; dependence on Wakefern for nearly all merchandise and key services; labor, healthcare and pension costs, including multi-employer plan exposure; and food-safety, information-system and cybersecurity risks. The company also disclosed exposure to interest-rate changes on Wakefern deposits and notes receivable.
Important facts for investors to verify
- Whether same-store sales growth excluding weather effects remains consistent with the 0.5%–1.5% fiscal-year outlook, given competitor openings and deflation in meat, seafood and dairy.
- Whether departmental margins, Wakefern assessments, pension costs and other operating expenses continue to pressure profitability.
- Subsequent pension remeasurement results and the financial effects of the benefit freeze and higher 401(k) matching contribution.
- Whether the Maryland stores’ deteriorating sales trends lead to asset impairment, and whether further Sandy-related insurance recoveries occur.
- Updates to Wakefern-related exposures, tax contingencies, multi-employer pension obligations and the company’s liquidity and capital-spending plans.