Village Super Market, Inc. — Q3 FY2013 Form 10-Q
Reporting period: Quarter ended April 27, 2013 (13 weeks); year-to-date period comprises 39 weeks. Financial statement amounts are in thousands of dollars, except per-share data. The company operates 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | 39 weeks FY2013 | 39 weeks FY2012 |
|---|---|---|---|---|
| Sales | $359.8 million | $347.0 million | $1,100.1 million | $1,052.4 million |
| Gross profit | $97.3 million | $95.2 million | $295.9 million | $287.6 million |
| Operating income | $8.2 million | $11.6 million | $33.1 million | $40.1 million |
| Net income | $4.6 million | $6.5 million | $19.6 million | $22.4 million |
| Gross margin | 27.05% | 27.45% | 26.89% | 27.33% |
| Operating margin | 2.27% | 3.34% | 3.01% | 3.81% |
| Net margin | 1.28% | 1.88% | 1.78% | 2.13% |
Q3 basic/diluted EPS was $0.38/$0.33 for Class A and $0.25/$0.25 for Class B. Nine-month basic/diluted EPS was $1.68/$1.40 for Class A and $1.01/$1.01 for Class B.
Liquidity, cash flow and debt
- Cash and cash equivalents were $103.4 million at April 27, 2013, little changed from $103.1 million at July 28, 2012. Working capital was $72.3 million; the working-capital ratio was 1.7:1.
- Operating cash flow for the first 39 weeks was $35.0 million, versus $25.3 million a year earlier. Capital expenditures were $14.5 million; dividends paid were $21.0 million, including $12.0 million of special dividends. Cash increased $0.3 million over the period.
- Capital and financing lease obligations totaled $41.0 million; notes payable to Wakefern totaled $2.5 million. No current portion of lease obligations was reported. The company also held a $22.0 million Wakefern note receivable at a fixed 7% interest rate, scheduled to mature May 20, 2014, subject to automatic extensions and Wakefern’s prepayment right.
- Cash and cash equivalents included $81.5 million in Wakefern demand deposits earning overnight market rates. The filing says cash on hand and operating cash flow are expected to meet anticipated liquidity needs.
Changes and management explanation
- Sales rose 3.7% in Q3 and 4.5% year to date. Management attributed growth to same-store sales, modest inflation and, year to date, the Old Bridge store; Q3 same-store sales benefited from stronger Maryland stores and a remodeled store.
- Despite higher sales, Q3 net income fell 29%. Gross margin declined as the company invested in lower prices to compete, while operating and administrative costs rose, including payroll and employee benefits. Management also cited added customer-service offerings.
- For the nine-month comparison, management said adjusted net income, excluding specified unusual items in both years, declined 16%. Maryland stores’ sales and operating performance remained below expectations, although their losses were lower than during their initial operating period.
- Operating cash flow improved partly because the prior-year period included a $7.0 million pension-liability settlement and because of timing differences in payables.
Outlook, unusual items and risks
- Management expected FY2013 same-store sales growth of 2.75%–3.50%, modest retail price inflation in FY2013 and FY2014, and an effective FY2013 tax rate of 41.5%–42.5%. The company budgeted approximately $20 million of FY2013 capital expenditures for a replacement-store project and three major remodels.
- 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 expected higher medical and pension costs and said operating cash flow and other liquidity sources should be adequate for foreseeable requirements.
- Hurricane Sandy temporarily closed nearly all stores for periods ranging from hours to eight days, caused perishable-product losses, and generated repair and other costs. Insurance recovery discussions were ongoing; management did not expect the storm’s overall impact, including uninsured losses, to be material to FY2013 results.
- Nine-month FY2013 results included $1.45 million of partnership income, a $693,000 after-tax credit from a national credit-card lawsuit settlement, and a $376,000 after-tax landlord-dispute charge. FY2012 included a $374,000 after-tax benefit from settlement of a pension withdrawal liability. The company received $1.98 million in partnership distributions.
- Risks highlighted include intense competition and narrow margins; economic and inflation pressures; underperformance and market-building costs in Maryland; reliance on Wakefern for substantially all merchandise and other services; collective-bargaining, pension and healthcare costs; food-safety exposure; and potential additional multi-employer pension withdrawal liability. The company said the effect of new healthcare requirements could not yet be determined.
Key facts for investors to verify
- Whether same-store sales achieve management’s 2.75%–3.50% FY2013 expectation, and the contribution from Maryland stores.
- Progress and costs for the replacement store and remodels against the approximately $20 million capital budget.
- Insurance proceeds and any remaining uninsured financial impact from Hurricane Sandy.
- Future pension contributions and exposure to multi-employer plan funding or withdrawal liabilities; the company expected an additional $2.804 million pension contribution in Q4 FY2013.
- Wakefern-related credit and operating concentration, including the demand deposits and note receivable, and the sustainability of dividends alongside capital spending.
Management reported that disclosure controls were effective and that there had been no significant changes in internal control over financial reporting during the quarter.