AMCON Distributing Company (NYSE American: DIT) — Q3 FY2020 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2020; comparative periods ended June 30, 2019. AMCON distributes consumer products to retail outlets and operates 21 natural-food stores. Figures below are unaudited.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Sales | $396.9M | $370.0M | $1,094.8M | $1,025.4M |
| Gross profit / margin | $21.7M / 5.5% | $20.5M / 5.5% | $63.2M / 5.8% | $61.7M / 6.0% |
| Operating income | $2.5M | $1.4M | $5.0M | $6.0M |
| Net income | $1.6M | $0.7M | $2.7M | $3.4M |
| Diluted EPS | $2.77 | $1.10 | $4.79 | $5.56 |
| Interest expense | $0.46M | $0.38M | $1.32M | $1.10M |
For the nine months, operating cash flow was $18.1M, versus $10.8M a year earlier. Investing used $12.9M, including $6.5M invested in Team Sledd and a $3.5M loan to it; financing used $5.0M. Cash increased $0.26M to $0.60M.
At June 30, 2020, cash was $0.6M, current assets $123.5M, and current liabilities $37.3M. Accounts receivable was $33.6M and inventory $82.0M. The revolving facility had $56.4M outstanding and $38.6M available against a collateral-based limit of $95.0M. Long-term debt, including current maturities, totaled about $3.3M. Operating lease liabilities were $20.1M and are separate from debt. Shareholders’ equity was $64.0M.
Changes and operating drivers
- Q3 sales increased 7.3%; operating income rose 77.6% and net income rose 137.3% year over year. Wholesale sales growth reflected cigarette price increases, cigarette volume and mix, higher excise taxes, and growth in other product categories. Retail sales benefited from pandemic-related pantry stocking and competitor closures.
- Nine-month sales increased 6.8%, but gross margin declined to 5.8% from 6.0%; operating income fell 16.4% and net income fell 20.5%. Higher operating costs and weaker retail gross profit contributed. Retail nine-month gross profit fell 9.9%, with gross margin at 34.3% versus 38.8%.
- At quarter end, receivables were higher and inventory lower than at September 30, 2019. The company attributed stronger operating cash flow in part to inventory reduction; cash flows remain affected by inventory purchasing and seasonal working-capital needs.
Outlook, risks and notable items
- No quantitative earnings or revenue guidance is provided. Management says both segments continued operating as essential suppliers. Most wholesale customers had reopened by June, with improved traffic and sales, but foodservice sales mix remained challenging; retail stores saw increased traffic tied to pantry building and competitor closures.
- Management considers liquidity and access to capital sufficient, but says the operating environment is fluid and the longer-term effects of COVID-19 are uncertain. Risks include supply-chain or warehouse disruption, customer credit defaults, reduced demand, labor and insurance costs, tobacco regulation and taxes, competition, and retail repositioning and store risks. The company does not hedge interest-rate or fuel-cost exposure.
- In April 2020, AMCON completed its Team Sledd transaction: it contributed $10.0M, comprising a $6.5M equity investment for approximately 44% ownership and a $3.5M secured, subordinated loan. It recorded $0.1M of equity-method earnings in Q3.
- The company adopted lease accounting Topic 842 in fiscal Q1, recognizing approximately $21.9M of right-of-use assets and $22.2M of lease liabilities at adoption; management said the adoption materially affected the balance sheet but not operations or cash flows. No legal proceedings were reported. Disclosure controls were assessed as effective.
Investor verification priorities
- Verify the sustainability and drivers of Q3 earnings improvement against the weaker nine-month operating and net income results.
- Assess whether reported sales growth reflects durable volume and mix or primarily supplier pricing and tobacco excise taxes, and track the challenged foodservice mix.
- Review customer receivable quality, inventory and seasonal working-capital requirements, facility availability, and covenant headroom; the fixed-charge coverage ratio was above 1.0 and the covenant applies if excess availability falls below its specified threshold.
- Evaluate Team Sledd’s performance, the recoverability and subordination terms of its loan, and the carrying value of AMCON’s investment.
- Monitor COVID-19 impacts, retail margins, and other disclosed risks; management states that future effects on revenues, costs, cash flows, and customer credit are uncertain.